(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $0.01 par value and associated New York Stock Exchange
rights to purchase Chicago Stock Exchange
preference stock New York Stock Exchange
REI Trust I 7.20% Trust
Originated Preferred Securities, Series C

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of each of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [X] No [ ]

The aggregate market value of the voting stock held by non-affiliates of
CenterPoint Energy, Inc. (Company) was $2,475,383,918 as of June 30, 2003, using
the definition of beneficial ownership contained in Rule 13d-3 promulgated
pursuant to the Securities Exchange Act of 1934 and excluding shares held by
directors and executive officers. As of February 29, 2004, the Company had
306,736,880 shares of Common Stock outstanding, including 658,386 ESOP shares
not deemed outstanding for financial statement purposes. Excluded from the
number of shares of Common Stock outstanding are 166 shares held by the Company
as treasury stock.

Portions of the definitive proxy statement relating to the 2004 Annual
Meeting of Shareholders of the Company, which will be filed with the Securities
and Exchange Commission within 120 days of December 31, 2003, are incorporated
by reference in Item 10, Item 11, Item 12, Item 13 and Item 14 of Part III of
this Form 10-K.

From time to time we make statements concerning our expectations, beliefs,
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements that are not historical facts. These
statements are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those expressed or implied by these statements. You can generally identify
our forward-looking statements by the words "anticipate," "believe," "continue,"
"could," "estimate," "expect," "forecast," "goal," "intend," "may," "objective,"
"plan," "potential," "predict," "projection," "should," "will," or other similar
words.

We have based our forward-looking statements on our management's beliefs
and assumptions based on information available to our management at the time the
statements are made. We caution you that assumptions, beliefs, expectations,
intentions and projections about future events may and often do vary materially
from actual results. Therefore, we cannot assure you that actual results will
not differ materially from those expressed or implied by our forward-looking
statements.

Some of the factors that could cause actual results to differ from those
expressed or implied by our forward-looking statements are described under "Risk
Factors" beginning on page 26 in Item 1 of this report.

You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statements.

ii

PART I

ITEM 1. BUSINESS

OUR BUSINESS

OVERVIEW

We are a public utility holding company whose wholly owned subsidiaries
include:

- CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which
provides electric transmission and distribution services to approximately
1.8 million metered customers in a 5,000-square-mile area of the Texas
Gulf Coast that has a population of approximately 4.7 million people and
includes Houston, and

We also have an approximately 81% ownership interest in Texas Genco
Holdings, Inc. (Texas Genco), which owns and operates a portfolio of generating
assets with an aggregate net generating capacity of 14,153 megawatts (MW), of
which 2,988 MW of gas-fired capacity was mothballed as of December 31, 2003. We
distributed approximately 19% of the outstanding common stock of Texas Genco to
our shareholders in January 2003.

We are a registered public utility holding company under the Public Utility
Holding Company Act of 1935, as amended (the 1935 Act). The 1935 Act and related
rules and regulations impose a number of restrictions on our activities and
those of our subsidiaries other than Texas Genco. The 1935 Act, among other
things, limits our ability and the ability of our regulated subsidiaries to
issue debt and equity securities without prior authorization, restricts the
source of dividend payments to current and retained earnings without prior
authorization, regulates sales and acquisitions of certain assets and businesses
and governs affiliate transactions.

In October 2003, the Federal Energy Regulatory Commission (FERC) granted
exempt wholesale generator status to Texas Genco, LP, the wholly owned
subsidiary of Texas Genco that owns and operates its electric generating plants.
As a result of the FERC's actions, Texas Genco, LP is exempt from all provisions
of the 1935 Act as long as it remains an exempt wholesale generator, and Texas
Genco is no longer a public utility holding company within the meaning of the
1935 Act.

We make available free of charge on our Internet website our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such reports with, or furnish them to, the
Securities and Exchange Commission (SEC). Additionally, we make available free
of charge on our Internet website:

Any shareholder who so requests may obtain a printed copy of any of these
documents from us. Changes in or waivers of our Code of Ethics for our Chief
Executive Officer and Senior Financial Officers and waivers of our Ethics and
Compliance Code for directors or executive officers will be posted on our
Internet website within five business days and maintained for at least twelve
months or reported on Item 10 of our Forms 8-K. Our web site address is
www.centerpointenergy.com.

Significant Events

The final reconciliation of the true-up components by the Public Utility
Commission of Texas (the Texas Utility Commission) and the expected monetization
of our remaining interest in Texas Genco are the two most significant events
facing us in 2004. Pursuant to the Texas Electric Choice Plan (the Texas
electric restructuring law), CenterPoint Houston is permitted to recover the
true-up components to the extent established in a Texas Utility Commission
proceeding. On January 23, 2004, Reliant Resources, Inc. (Reliant Resources)
announced that it would not exercise its option to purchase the common stock of
Texas Genco that we own. We expect to monetize our remaining 81% interest in
Texas Genco and have engaged a financial advisor to assist us. We expect the
proceeds from these two events will result in aggregate proceeds of over $5
billion based on Texas Utility Commission rules. We have committed to use such
proceeds to repay our indebtedness.

One of the true-up components which CenterPoint Houston is permitted to
recover under the Texas electric restructuring law is an amount designed to
true-up the difference between the Texas Utility Commission's projected market
prices for generation during 2002 and 2003 and the actual market prices for
generation as determined in the state-mandated capacity auctions during that
period. We recorded non-cash revenue for this capacity auction true-up or "ECOM
revenue" of $697 million in 2002 and $661 million in 2003. In 2004, we will no
longer be permitted under the Texas electric restructuring law to record
non-cash ECOM revenue.

For more information on these and other matters currently affecting us,
please see "-- Electric Transmission and Distribution -- True-Up Components and
Securitization" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Executive Summary -- Significant Events in 2004."

ELECTRIC TRANSMISSION & DISTRIBUTION

Electric Transmission

CenterPoint Houston transports electricity from power plants to substations
and from one substation to another and to retail electric customers taking power
above 69 kilovolts (kV) in locations throughout the control area managed by the
Electric Reliability Council of Texas, Inc. (ERCOT) on behalf of retail electric
providers. CenterPoint Houston provides transmission services under tariffs
approved by the Texas Utility Commission.

Electric Distribution

In Texas, end users purchase their electricity directly from the
certificated "retail electric providers." CenterPoint Houston distributes
electricity for retail electric providers in its certificated service area by
carrying lower-voltage power from the substation to the retail electric
customer. Its distribution network receives electricity from the transmission
grid through power distribution substations and distributes electricity to end
users through distribution feeders. CenterPoint Houston's operations include
construction and maintenance of electric transmission and distribution
facilities, metering services, outage response services and call center
operations. CenterPoint Houston provides distribution services under tariffs
approved by the Texas Utility Commission. Texas Utility Commission rules and
market protocols govern the commercial retail operations of distribution
companies and other market participants.

2

ERCOT Market Framework

CenterPoint Houston is a member of ERCOT. ERCOT is a network of retail
customers, investor and municipally owned electric utilities, rural electric
co-operatives, river authorities, independent generators, power marketers and
retail electric providers, which serves as the regional reliability coordinating
council for member electric power systems in Texas. Texas Genco sells electric
generation capacity, energy and ancillary services in the ERCOT market. The
ERCOT market includes much of the State of Texas, other than a portion of the
panhandle, a portion of the eastern part of the state bordering on Louisiana and
the area in and around El Paso. The ERCOT market represents approximately 85% of
the demand for power in Texas and is one of the nation's largest power markets.
The ERCOT market includes an aggregate net generating capacity of approximately
78,000 MW, approximately 14,000 MW of which are owned by Texas Genco. There are
only limited direct current interconnections between the ERCOT market and other
power markets in the United States.

The ERCOT market operates under the reliability standards set by the North
American Electric Reliability Council. The Texas Utility Commission has primary
jurisdiction over the ERCOT market to ensure the adequacy and reliability of
electricity supply across the state's main interconnected power transmission
grid. The ERCOT independent system operator (ERCOT ISO) is responsible for
maintaining reliable operations of the bulk electric power supply system in the
ERCOT market. Its responsibilities include ensuring that electricity production
and delivery are accurately accounted for among the generation resources and
wholesale buyers and sellers. Unlike certain other regional power markets, the
ERCOT market is not a centrally dispatched power pool, and the ERCOT ISO does
not procure energy on behalf of its members other than to maintain the reliable
operations of the transmission system. Members are responsible for contracting
sales and purchases of power bilaterally. The ERCOT ISO also serves as agent for
procuring ancillary services for those who elect not to provide their own
ancillary services.

CenterPoint Houston's electric transmission business supports the operation
of the ERCOT ISO and all ERCOT members. The transmission business has planning,
design, construction, operation and maintenance responsibility for the portion
of the transmission grid and for the load-serving substations it owns, primarily
within its certificated area. The transmission business is participating with
the ERCOT ISO and other ERCOT utilities to plan, design, obtain regulatory
approval for and construct new transmission lines necessary to increase bulk
power transfer capability and to remove existing constraints on the ERCOT
transmission grid.

True-Up Components and Securitization

The Texas Electric Restructuring Law. In June 1999, the Texas legislature
adopted the Texas electric restructuring law, which substantially amended the
regulatory structure governing electric utilities in order to allow and
encourage retail competition which began in January 2002. The Texas electric
restructuring law required the separation of the generation, transmission and
distribution, and retail sales functions of electric utilities into three
different units. Under the law, neither the generation function nor the retail
function is subject to traditional cost of service regulation, and the
generation function and the retail function are each operated on a competitive
basis. Through a restructuring in the third quarter of 2002 in response to this
law, we became the parent of Reliant Energy, Incorporated (Reliant Energy) (now
CenterPoint Houston), Texas Genco and CERC. Subsequent to the restructuring, our
interest in Reliant Resources, which conducts non-utility wholesale and retail
energy operations, including CenterPoint Houston's former retail sales, was
divested.

The transmission and distribution function that CenterPoint Houston
performs remains subject to traditional utility rate regulation. CenterPoint
Houston recovers the cost of its service through an energy delivery charge
approved by the Texas Utility Commission. As a result of these changes, there
are no meaningful comparisons for the Electric Transmission & Distribution and
Electric Generation business segments prior to January 2002, when retail sales
became fully competitive.

Under the Texas electric restructuring law, transmission and distribution
utilities in Texas, such as CenterPoint Houston, whose generation assets were
"unbundled" may recover, following a regulatory

3

proceeding to be held in 2004 (the 2004 True-Up Proceeding) as further discussed
below in "-- 2004 True-Up Proceeding":

- "stranded costs," which consist of the positive excess of the regulatory
net book value of generation assets, as defined, over the market value of
the assets;

- the difference between the Texas Utility Commission's projected market
prices for generation during 2002 and 2003 and the actual market prices
for generation as determined in the state-mandated capacity auctions
during that period;

- the Texas jurisdictional amount reported by the previously vertically
integrated electric utilities as generation-related regulatory assets and
liabilities (offset and adjusted by specified amounts) in their audited
financial statements for 1998;

- final fuel over- or under-recovery; less

- "price to beat" clawback components.

The Texas electric restructuring law permits transmission and distribution
utilities to recover the true-up components through transition charges on retail
electric customers' bills, to the extent that such components are established in
certain regulatory proceedings. These transition charges are non-bypassable,
meaning that they must be paid by essentially all customers and cannot, except
in limited circumstances, be avoided by switching to self-generation. The law
also authorizes the Texas Utility Commission to permit those utilities to issue
transition bonds based on the securitization of revenues associated with the
transition charges. CenterPoint Houston recovered a portion of its regulatory
assets in 2001 through the issuance of transition bonds. For a further
discussion of these matters, see "-- Securitization" below.

The Texas electric restructuring law also provides specific regulatory
remedies to reduce or mitigate a utility's stranded cost exposure. During a base
rate freeze period from 1999 through 2001, earnings above the utility's
authorized rate of return formula were required to be applied in a manner to
accelerate depreciation of generation-related plant assets for regulatory
purposes if the utility was expected to have stranded costs. In addition,
depreciation expense for transmission and distribution-related assets could be
redirected to generation assets for regulatory purposes during that period if
the utility was expected to have stranded costs. We undertook both of these
remedies provided in the Texas electric restructuring law, but in a rate order
issued in October 2001, the Texas Utility Commission required us to reverse
those actions. See " -- Mitigation" below.

2004 True-Up Proceeding. In 2004, the Texas Utility Commission will
conduct true-up proceedings for investor-owned utilities. The purpose of the
true-up proceeding is to quantify and reconcile the amount of the true-up
components. The true-up proceeding will result in either additional charges
being assessed on, or credits being issued to, retail electric customers.
CenterPoint Houston expects to make the filing to initiate its true-up
proceeding on March 31, 2004. The Texas electric restructuring law requires a
final order to be issued by the Texas Utility Commission not more than 150 days
after a proper filing is made by the regulated utility, although under its rules
the Texas Utility Commission can extend the 150-day deadline for good cause. Any
delay in the final order date will result in a delay in the securitization of
CenterPoint Houston's true-up components and the implementation of the
non-bypassable charges described above, and could delay the recovery of carrying
costs on the true-up components determined by the Texas Utility Commission.

CenterPoint Houston will be required to establish and support the amounts
it seeks to recover in the 2004 True-Up Proceeding. CenterPoint Houston expects
these amounts to be substantial. Third parties will have the opportunity and are
expected to challenge CenterPoint Houston's calculation of these amounts. To the
extent recovery of a portion of these amounts is denied or if we agree to forego
recovery of a portion of the request under a settlement agreement, CenterPoint
Houston would be unable to recover those amounts in the future.

Following adoption of the true-up rule by the Texas Utility Commission in
2001, CenterPoint Houston appealed the provisions of the rule that permitted
interest to be recovered on stranded costs only from the date of the Texas
Utility Commission's final order in the 2004 True-Up Proceeding, instead of from
January 1,

4

2002 as CenterPoint Houston contends is required by law. On January 30, 2004,
the Texas Supreme Court granted CenterPoint Houston's petition for review of the
true-up rule. Oral arguments were heard on February 18, 2004. The decision by
the Court is pending. We have not accrued interest income on stranded costs in
our consolidated financial statements, but estimate such interest income would
be material to our consolidated financial statements.

Stranded Cost Component. CenterPoint Houston will be entitled to recover
stranded costs through a transition charge to its customers if the regulatory
net book value of generating plant assets exceeds the market value of those
assets. The regulatory net book value of generating plant assets is the balance
as of December 31, 2001 plus certain costs incurred for reductions in emissions
of oxides of nitrogen (NOx), any above-market purchased power contracts and
certain other amounts. The market value will be equal to the average daily
closing price on The New York Stock Exchange for publicly held shares of Texas
Genco common stock for 30 consecutive trading days chosen by the Texas Utility
Commission out of the last 120 trading days immediately preceding the true-up
filing, plus a control premium, up to a maximum of 10%, to the extent included
in the valuation determination made by the Texas Utility Commission. If Texas
Genco is sold to a third party at a lower price than the market value used by
the Texas Utility Commission, CenterPoint Houston would be unable to recover the
difference.

ECOM True-Up Component. The Texas Utility Commission used a computer model
or projection, called an excess cost over market (ECOM) model, to estimate
stranded costs related to generation plant assets. Accordingly, the Texas
Utility Commission estimated the market power prices that would be received in
the generation capacity auctions mandated by the Texas electric restructuring
law during 2002 and 2003. Any difference between the Texas Utility Commission's
projected market prices for generation during 2002 and 2003 and the actual
market prices for generation as determined in the state-mandated capacity
auctions during that period will be a component of the 2004 True-Up Proceeding.

In 2003, some parties sought modifications to the true-up rules. Although
the Texas Utility Commission denied that request, we expect that issues could be
raised in the 2004 True-Up Proceeding regarding our compliance with the Texas
Utility Commission's rules regarding the ECOM true-up, including whether Texas
Genco has auctioned all capacity it is required to auction in view of the fact
that some capacity has failed to sell in the state-mandated auctions. We believe
Texas Genco has complied with the requirements under the applicable rules,
including re-offering the unsold capacity in subsequent auctions. If events were
to occur during the 2004 True-Up Proceeding that made the recovery of the ECOM
true-up regulatory asset no longer probable, we would write off the
unrecoverable balance of that asset as a charge against earnings.

Fuel Over/Under Recovery Component. CenterPoint Houston and Texas Genco
filed their joint application to reconcile fuel revenues and expenses with the
Texas Utility Commission in July 2002. This final fuel reconciliation filing
covered reconcilable fuel expense and interest of approximately $8.5 billion
incurred from August 1, 1997 through January 30, 2002. In January 2003, a
settlement agreement was reached, as a result of which certain items totaling
$24 million were written off during the fourth quarter of 2002 and items
totaling $203 million were carried forward for later resolution by the Texas
Utility Commission. In late 2003, a hearing was concluded on those remaining
issues. On March 4, 2004, an Administrative Law Judge (ALJ) recommended that
CenterPoint Houston not be allowed to recover $87 million in fuel expenses
incurred during the reconciliation period. CenterPoint Houston will contest this
recommendation when the Texas Utility Commission considers the ALJ's conclusions
on April 15, 2004. However, since the recovery of this portion of the regulatory
asset is no longer probable, CenterPoint Houston reserved $117 million,
including interest, in the fourth quarter of 2003. The ALJ also recommended that
$46 million be recovered in the 2004 True-Up Proceeding rather than in the fuel
proceeding. The results of the Texas Utility Commission's decision will be a
component of the 2004 True-Up Proceeding.

"Price to Beat" Clawback Component. In connection with the implementation
of the Texas electric restructuring law, the Texas Utility Commission has set a
"price to beat" that retail electric providers affiliated or formerly affiliated
with a former integrated utility must charge residential and small commercial
customers within their affiliated electric utility's service area. The true-up
provides for a clawback of the "price to beat"

5

in excess of the market price of electricity if 40% of the "price to beat" load
is not served by other retail electric providers by January 1, 2004. Pursuant to
the Texas electric restructuring law and a master separation agreement entered
into in connection with the September 30, 2002 spin-off of our interest in
Reliant Resources to our shareholders, Reliant Resources is obligated to pay
CenterPoint Houston the clawback component of the true-up. Based on an order
issued on February 13, 2004 by the Texas Utility Commission, the clawback will
equal $150 times the number of residential customers served by Reliant Resources
in CenterPoint Houston's service territory, less the number of residential
customers served by Reliant Resources outside CenterPoint Houston's service
territory, on January 1, 2004. As reported in Reliant Resources' Annual Report
on Form 10-K for the year ended December 31, 2003, Reliant Resources expects
that the clawback payment will be $175 million. The clawback will reduce the
amount of recoverable costs to be determined in the 2004 True-Up Proceeding.

Securitization. The Texas electric restructuring law provides for the use
of special purpose entities to issue transition bonds for the economic value of
generation-related regulatory assets and stranded costs. These transition bonds
will be amortized over a period not to exceed 15 years through non-bypassable
transition charges. In October 2001, a special purpose subsidiary of CenterPoint
Houston issued $749 million of transition bonds to securitize certain
generation-related regulatory assets. These transition bonds have a final
maturity date of September 15, 2015 and are non-recourse to us and our
subsidiaries other than to the special purpose issuer. Payments on the
transition bonds are made out of funds from non-bypassable transition charges.

We expect that upon completion of the 2004 True-Up Proceeding, CenterPoint
Houston will seek to securitize the amounts established for the true-up
components. Before CenterPoint Houston can securitize these amounts, the Texas
Utility Commission must conduct a proceeding and issue a financing order
authorizing CenterPoint Houston to do so. Under the Texas electric restructuring
law, CenterPoint Houston is entitled to recover any portion of the true-up
balance not securitized by transition bonds through a non-bypassable competition
transition charge.

Mitigation. In an order issued in October 2001, the Texas Utility
Commission established the transmission and distribution rates that became
effective in January 2002. The Texas Utility Commission determined that
CenterPoint Houston had over-mitigated its stranded costs by redirecting
transmission and distribution depreciation and by accelerating depreciation of
generation assets as provided under its transition plan and the Texas electric
restructuring law. In this final order, CenterPoint Houston was required to
reverse the amount of redirected depreciation and accelerated depreciation taken
for regulatory purposes as allowed under the transition plan and the Texas
electric restructuring law. In accordance with the order, CenterPoint Houston
recorded a regulatory liability to reflect the prospective refund of the
accelerated depreciation, and in January 2002 CenterPoint Houston began
refunding excess mitigation credits, which are to be refunded over a seven-year
period. The annual refund of excess mitigation credits is approximately $238
million. In the event that the excess mitigation credits prove to have been
unnecessary and CenterPoint Houston is determined to have stranded costs, the
excess mitigation credits will be included in the stranded costs to be
recovered. In June 2003, CenterPoint Houston sought authority from the Texas
Utility Commission to terminate these credits based on then current estimates of
what that final determination would be. The Texas Utility Commission denied the
request in January 2004.

Customers

CenterPoint Houston's customers consist of municipalities, electric
cooperatives, other distribution companies and approximately 43 retail electric
providers in its certificated service area. CenterPoint Houston serves nearly
all of the Houston/Galveston metropolitan area. Each retail electric provider is
licensed by, and must meet creditworthiness criteria established by, the Texas
Utility Commission. Two of these retail electric providers are subsidiaries of
Reliant Resources. Sales to subsidiaries of Reliant Resources represented
approximately 83% and 78% of CenterPoint Houston's transmission and distribution
revenues in 2002 and 2003, respectively. CenterPoint Houston's billed
receivables balance from retail electric providers as of December 31, 2003 was
$83 million. Approximately 70% of this amount was owed by subsidiaries of
Reliant Resources. CenterPoint Houston does not have long-term contracts with
any of its customers. It operates on a

6

continuous billing cycle, with meter readings being conducted and invoices being
distributed to retail electric providers each business day.

Competition

There are no other transmission and distribution utilities in CenterPoint
Houston's service area. In order for another provider of transmission and
distribution services to provide such services in CenterPoint Houston's
territory, it would be required to obtain a certificate of convenience and
necessity in proceedings before the Texas Utility Commission and, depending on
the location of the facilities, may also be required to obtain franchises from
one or more municipalities. We know of no other party intending to enter this
business in CenterPoint Houston's service area at this time.

Properties

All of CenterPoint Houston's properties are located in Texas. CenterPoint
Houston's transmission system carries electricity from power plants to
substations and from one substation to another. These substations serve to
connect power plants, the high voltage transmission lines and the lower voltage
distribution lines. Unlike the transmission system, which carries high voltage
electricity over long distances, distribution lines carry lower voltage power
from the substation to the retail electric customers. The distribution system
consists primarily of distribution lines, transformers, secondary distribution
lines and service wires and meters. Most of CenterPoint Houston's transmission
and distribution lines have been constructed over lands of others pursuant to
easements or along public highways and streets as permitted by law.

All real and tangible properties of CenterPoint Houston, subject to certain
exclusions, are currently subject to:

- the lien of a Mortgage and Deed of Trust (the Mortgage) dated November 1,
1944, as supplemented; and

- the lien of a General Mortgage (the General Mortgage) dated October 10,
2002, as supplemented, which is junior to the lien of the Mortgage.

As of March 1, 2004, CenterPoint Houston had outstanding approximately $382
million aggregate principal amount of first mortgage bonds under the Mortgage,
including approximately $280 million held in trust to secure certain pollution
control bonds for which CenterPoint Energy is obligated. Additionally, under the
General Mortgage, CenterPoint Houston had outstanding approximately $3.2 billion
aggregate principal amount of general mortgage bonds, including approximately
$527 million held in trust to secure certain additional pollution control bonds
for which CenterPoint Energy is obligated, approximately $100 million held in
trust to secure pollution control bonds for which CenterPoint Houston is
obligated and approximately $1.3 billion aggregate principal amount of general
mortgage bonds to secure the borrowings under a collateralized term loan due in
2005.

Electric Lines -- Overhead. As of December 31, 2003, CenterPoint Houston
owned 26,505 pole miles of overhead distribution lines and 3,606 circuit miles
of overhead transmission lines, including 446 circuit miles operated at 69,000
volts, 2,083 circuit miles operated at 138,000 volts and 1,077 circuit miles
operated at 345,000 volts.

Electric Lines -- Underground. As of December 31, 2003, CenterPoint
Houston owned 14,917 circuit miles of underground distribution lines and 16.6
circuit miles of underground transmission lines, including 4.5 circuit miles
operated at 69,000 volts and 12.1 circuit miles operated at 138,000 volts.

Substations. As of December 31, 2003, CenterPoint Houston owned 224 major
substation sites having total installed rated transformer capacity of 44,964
megavolt amperes.

Service Centers. CenterPoint Houston operates 15 regional service centers
located on a total of 395 acres of land. These service centers consist of office
buildings, warehouses and repair facilities that are used in the business of
transmitting and distributing electricity.

Franchises. CenterPoint Houston has franchise contracts with 90 of the 91
cities in its service area. The remaining city has enacted an ordinance that
governs the placement of utility facilities in its streets. These franchises and
this ordinance, typically having a term of 40 years, give CenterPoint Houston
the right to

7

construct, operate and maintain its transmission and distribution system within
the streets and public ways of these municipalities for the purpose of
delivering electric service to the municipality, its residents and businesses in
exchange for payment of a fee. The franchise for the City of Houston is
scheduled to expire in 2007.

As of December 31, 2003, 2,988 MW of Texas Genco's gas-fired generation was
mothballed. We expect that 777 MW of this amount will remain mothballed through
April 2004 and the other 2,211 MW will remain mothballed through April 2005. The
decision to mothball these units was based on the lack of demand for these types
of units in Texas Genco's July and September 2003 capacity auctions combined
with high forecasted reserve margins in the ERCOT market.

Under the Texas electric restructuring law, Texas Genco and other power
generators in Texas ceased to be subject to traditional cost-based regulation.
Since January 1, 2002, Texas Genco has been selling generation capacity, energy
and ancillary services to wholesale purchasers at prices determined by the
market. Because of this change, historical financial information and operating
data for periods prior to January 1, 2002, including demand and fuel data, is
not indicative of how this business may be expected to perform in subsequent
periods.

Facilities

Texas Genco's generation facilities as of December 31, 2003 are described
in the table below.

In early March 2004, one of the other co-owners of the South Texas Project
announced it had entered into an agreement to sell its 25.2% ownership interest
for approximately $332.6 million, subject to certain closing adjustments. As a
result, under the terms of the ownership arrangements for the South Texas
Project, Texas Genco has the right of first refusal to purchase its
proportionate share of the interest being sold on the same terms as the third
party purchaser, but Texas Genco must give notice of its election within ninety
days.

Operations and Capacity Auctions

Since January 1, 2002, Texas Genco has operated its generation business
solely in the wholesale market. It is required by the Texas electric
restructuring law to auction 15% of its available generation capacity (in what
we refer to as state-mandated auctions) and until January 24, 2004 sold the
remaining 85% of its available generation capacity (less operating reserves) in
auctions mandated by an agreement with Reliant Resources (in what we refer to as
contractually-mandated auctions). Texas Genco's auction products are only
entitlements to capacity dispatched to specific zonal delivery points from base,
intermediate, cyclic or peaking units and do not convey a right to receive power
from a particular unit. By selling only entitlements, Texas Genco is able to
dispatch its commitments in the most cost-effective manner. Texas Genco is,
however, exposed to the risk that, depending upon the availability of its units,
it could be required to supply energy from a higher cost unit such as an
intermediate unit to meet an obligation for lower-cost generation, such as base-
load generation, or to obtain the energy on the open market at a market price
higher than its contracted price. Additionally, Texas Genco, like other power
generating companies within ERCOT, is required to purchase power from certain
qualifying facilities under the Public Utility Regulatory Policies Act of 1978
at avoided cost.

Revenues from capacity auctions come from two sources: capacity payments
and energy payments. Capacity payments are based on the final clearing prices,
in dollars per kilowatt-month, determined during the auctions. Texas Genco bills
and collects for these capacity payments on a monthly basis just prior to the
month of the entitlement. Energy payments consist of a variety of charges
related to the fuel and ancillary services scheduled through the auctioned
capacity entitlements. Energy payments for base-load products are tied to fixed
prices specified in the auction products while energy payments for gas-fired
products are recovered through heat rates specified for gas auction products
times an index based on the Houston Ship Channel Gas price. Texas Genco invoices
for these energy payments on a monthly basis in arrears.

State-Mandated Capacity Auctions. The obligation to conduct state-mandated
auctions of 15% of Texas Genco's available generation capacity will continue
until January 1, 2007, unless before that date the Texas Utility Commission
determines that an amount equal to at least 40% of the electric power consumed
before the onset of competition by residential and small commercial customers in
CenterPoint Houston's service area is being served by retail electric providers
not affiliated or formerly affiliated with us. Reliant Resources is deemed to be
our affiliate for purposes of this test. Reliant Resources currently is not
permitted under the Texas electric restructuring law to purchase capacity sold
by Texas Genco in the state-mandated auctions.

Contractually-Mandated Capacity Auctions. Through 2003, Texas Genco was
contractually obligated under an agreement with Reliant Resources to auction
entitlements to substantially all of its capacity (less operating reserves)
available after the state-mandated auctions. Texas Genco was permitted to reduce
the amount of capacity sold in the contractually-mandated auctions by the amount
of operating reserves required to back up its obligations under its capacity
auctions. Texas Genco typically reserves 1,250 MW of its capacity, including 750
MW of base-load capacity, as operating reserves, which can be sold as
interruptible power on a system-contingent basis.

Through 2003, Reliant Resources had the contractual right, but not the
obligation, to purchase 50% (but not less than 50%) of each type of capacity
entitlement Texas Genco auctioned in the contractually-mandated auctions at the
prices established in the auctions. Upon determination of the prices for the
capacity entitlements, Reliant Resources was obligated to purchase the capacity
it elected to reserve from the auction

9

process at the prices set during the auction for that entitlement. In addition
to its reservation of capacity, and whether or not it had reserved capacity in
the auction, Reliant Resources was entitled to bid for entitlements in each
contractually-mandated auction.

Beginning in 2004, Texas Genco can market the 85% of its capacity not
subject to state-mandated auctions as it deems appropriate based upon market
conditions, and sales may be conducted through auctions, bilateral contracts or
a combination of both.

Auction Results. Texas Genco sold 91% of its available capacity for 2003
through state-mandated auctions and contractually-mandated auctions. In its
capacity auctions held through February 2004, Texas Genco has sold 85% and 24%
of its available capacity for 2004 and 2005, respectively. As a result, Texas
Genco has contracted for approximately $1 billion of total revenue with respect
to its 2004 capacity and approximately $533 million of total revenue with
respect to its 2005 capacity. Texas Genco's available capacity equals its total
net generating capacity less capacity withheld as operating reserves and
capacity that is subject to planned outages. Of the 2,988 MW of capacity that
Texas Genco has "mothballed", 2,062 MW were included in its available capacity
only for the months of May through September 2003. Reliant Resources purchased
78% of Texas Genco's sold 2003 capacity and, through February 2004, had
purchased 79% and 68% of Texas Genco's sold 2004 and 2005 capacity,
respectively. Texas Genco will hold additional auctions to sell its remaining
available capacity for 2004 as well as capacity for subsequent years.

In 2003, the market-based prices established in Texas Genco's capacity
auctions continued to strengthen. Higher gas prices throughout 2003 positively
influenced the prices established in its recent capacity auctions. Generally,
higher gas prices increase the capacity prices for its base-load entitlements
since natural gas is the marginal fuel for facilities serving the ERCOT market
during most hours.

Fuel Supplies

Texas Genco relies primarily on natural gas, coal, lignite and uranium to
fuel its generation facilities. The fuel mix of Texas Genco's generating
portfolio, based on actual fuel usage during 2003, was approximately 52% coal
and lignite, 21% natural gas and 27% nuclear. As of December 31, 2003, the fuel
mix of its generating portfolio based on the capacity of its facilities
including mothballed capacity was approximately 66% natural gas, 29% coal and
lignite and 5% nuclear. Based on Texas Genco's current assumptions regarding the
cost and availability of fuel, plant operation schedules, load growth, load
management and the impact of environmental regulations, it does not expect the
mix of fuel used by its generating portfolio will vary materially during 2004
from 2003. Texas Genco substantially collects the underlying cost of fuel
through energy payments. As a result of air emissions standards imposed by
federal and state law, Texas Genco anticipates having additional costs for
certain environmental equipment in 2004 and subsequent years. These factors
could affect the mix of its future fuel usage.

Natural Gas. Texas Genco has long-term natural gas supply contracts with
several suppliers. Substantially all of its long-term natural gas supply
contracts contain pricing provisions based on fluctuating spot market prices. In
2003, 50% of Texas Genco's natural gas requirements were purchased under these
long-term contracts. Texas Genco purchased the remaining 50% of its natural gas
requirements in 2003 on the spot market. Based on current market conditions,
Texas Genco believes it will be able to replace the supplies of natural gas
covered under its long-term contracts when they expire with gas purchased on the
spot market or under new long-term or short-term contracts.

Texas Genco's natural gas requirements are generally more volatile than its
other fuel requirements because it uses natural gas to fuel intermediate, cyclic
and peaking facilities and other more economical fuels to fuel base-load
facilities. Since its intermediate and peaking facilities are dispatched to meet
the variations of demand for electricity, its gas requirements are highly
variable, on both an hour-to-hour and day-to-day basis. Although natural gas
supplies have been sufficient in recent years, available supplies are subject to
potential disruption due to weather conditions, transportation constraints and
other events. As a result of these factors, supplies of natural gas may become
unavailable from time to time or prices may increase rapidly in response to
temporary supply constraints or other factors. Although its long-term supply
contracts provide some of the flexibility needed to accommodate variations in
demands for natural gas, Texas Genco relies on its 6.3 billion

10

cubic feet of leased gas storage facilities, of which 4.2 billion cubic feet is
working capacity, to provide additional flexibility.

Coal and Lignite. In 2003, Texas Genco purchased approximately 80% of the
fuel requirements for its four coal-fired generating units at its W.A. Parish
facility under two fixed-quantity, long-term supply contracts scheduled to
expire in 2010 and 2011. The price for coal under the first contract was tied to
spot market prices in 2003. The price for coal under the second contract was at
a level approximately three times greater than the spot market prices for coal
as of December 31, 2003. The second contract does not contemplate future prices
being tied to spot market prices. The terms of this contract result from the
market conditions in effect during the 1970's when the contract was entered
into, including shortages of natural gas supplies, increased demand for low
sulfur coal as a result of new environmental regulations and uncertainty
regarding the future availability of long-term sources of coal supply. Texas
Genco purchases its remaining coal requirements for the W.A. Parish facility
under short-term contracts. It has long-term rail transportation contracts with
Burlington Northern Santa Fe Railroad and the Union Pacific Railroad Company to
transport coal to the W.A. Parish facility. Despite the higher coal prices under
these long-term contracts, Texas Genco's fuel costs associated with producing
energy from its coal-fired facilities are, based on recent natural gas prices,
significantly lower than the fuel costs associated with producing energy from
its gas-fired facilities.

Texas Genco obtains the lignite used to fuel the two generating units of
the Limestone facility from a surface mine adjacent to the facility. It owns the
mining equipment and facilities and a portion of the lignite reserves located at
the mine. Mining operations are conducted by the owner of the remaining lignite
reserves. In the past, Texas Genco has obtained its lignite requirements under a
long-term contract on a cost-plus basis. Since July 2002, Texas Genco has
obtained its lignite requirements under an amended long-term contract with the
owner/operator of the mine at a fixed price determined annually that is expected
to result in a cost of generation at the Limestone facility equivalent to the
cost of generating with low-sulphur Western coal. Texas Genco expects the
lignite reserves will be sufficient to provide all of the lignite requirements
of this facility through 2015.

Texas Genco used a blend of lignite and Wyoming coal to fuel its Limestone
facility in 2003 as a component of its NOx control strategy. A fuel unloading
and handling system was installed at the Limestone facility to accommodate the
delivery of Wyoming coal. Texas Genco expects that it will obtain Wyoming coal
through spot and long-term market-priced contracts. Texas Genco's Limestone
facility is connected with the Burlington Northern Santa Fe Railroad.

Nuclear. The South Texas Project satisfies its fuel supply requirements by
acquiring uranium concentrates, converting uranium concentrates into uranium
hexafluoride, enriching uranium hexafluoride and fabricating nuclear fuel
assemblies. Texas Genco is a party to a number of contracts covering a portion
of the fuel requirements of the South Texas Project for uranium, conversion
services, enrichment services and fuel fabrication. Other than a fuel
fabrication agreement that extends for the life of the South Texas Project,
these contracts have varying expiration dates, and most are short- to
medium-term (less than seven years). Management believes that sufficient
capacity for nuclear fuel supplies and processing exists to permit normal
operations of the South Texas Project nuclear generating units.

Fuel Pipeline. Texas Genco owns a 90-mile fuel pipeline that can transport
either fuel oil or natural gas (86 miles oil or gas and 4 miles gas only). As
part of its system, it owns over six million barrels of oil storage capacity
that can supply fuel oil to its Cedar Bayou, Greens Bayou, S.R. Bertron and T.H.
Wharton plants. For natural gas supply, its pipeline is connected to six of its
generation facilities and is interconnected with several of its suppliers. Texas
Genco's pipeline provides it with added flexibility in managing the fuel supply
requirements of its generation facilities.

Customers

Since January 1, 2002, Texas Genco has sold power to wholesale purchasers,
including retail electric providers, at unregulated rates through its capacity
auctions. In addition to retail electric providers, Texas Genco's customers in
the ERCOT market include municipal utilities, electric co-operatives, power
trading organizations and other power generating companies. Texas Genco is also
a significant provider to the ancillary

11

services market operated by the ERCOT ISO. Sales to Reliant Resources
represented approximately 71% of Texas Genco's total revenues in 2003. Texas
Genco has been granted a security interest in accounts receivable and/or
securitization notes associated with the accounts receivable of certain
subsidiaries of Reliant Resources to secure up to $250 million in purchase
obligations.

Competition

The ERCOT market is highly competitive. Texas Genco has approximately 80
competitors that include generation companies affiliated with Texas-based
utilities, independent power producers, municipal or co-operative generators and
wholesale power marketers. These competitors will compete with Texas Genco and
each other by buying and selling wholesale power in the ERCOT market, entering
into bilateral contracts and/or selling to aggregated retail customers.

At December 31, 2003, Texas Genco's facilities provided over 18% of the
aggregate net generating capacity serving the ERCOT market. Texas Genco's
competition is based primarily on price but it also may compete based on product
flexibility. A number of Texas Genco's competitors are building efficient,
combined cycle power plants that are generally not able to provide the
operational flexibility, ancillary services and fuel risk mitigation that Texas
Genco's large diversified portfolio of generating facilities can provide. Texas
Genco believes that there may be significant excess generating capacity
constructed in the ERCOT market over the next several years. This overbuilding
could result in lower prices for wholesale power in the ERCOT market. There is
currently a surplus of generating capacity in the ERCOT market, and we expect
the market for wholesale power to be highly competitive. For more information on
competition in the ERCOT market, please read "Risk Factors -- Principal Risk
Factors Associated with Our Businesses -- Risk Factors Affecting Our Electric
Generation Business" below.

NATURAL GAS DISTRIBUTION

CERC's natural gas distribution business engages in intrastate natural gas
sales to, and natural gas transportation for, residential, commercial and
industrial customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma
and Texas through three unincorporated divisions: CenterPoint Energy Arkla
(Arkla), CenterPoint Energy Entex (Entex) and CenterPoint Energy Minnegasco
(Minnegasco). These operations are regulated as natural gas utility operations
in the jurisdictions served by these divisions. CERC's operations also include
non-rate regulated retail gas sales to and transportation services for
commercial and industrial customers in the six states listed above as well as
several other Midwestern states.

- Arkla provides natural gas distribution services to approximately 695,000
customers in over 245 communities in Arkansas, Louisiana, Oklahoma and
Texas. The largest metropolitan areas served by Arkla are Little Rock,
Arkansas and Shreveport, Louisiana. In 2003, approximately 70% of Arkla's
total throughput was attributable to retail sales of natural gas and
approximately 30% was attributable to transportation services.

- Entex provides natural gas distribution services to approximately 1.6
million customers in over 500 communities in Louisiana, Mississippi and
Texas. The largest metropolitan area served by Entex is Houston. In 2003,
approximately 94% of Entex's total throughput was attributable to retail
sales of natural gas and approximately 6% was attributable to
transportation services.

- Minnegasco provides natural gas distribution services to approximately
746,000 customers in over 240 communities in Minnesota. The largest
metropolitan area served by Minnegasco is Minneapolis. In 2003,
approximately 94% of Minnegasco's total throughput was attributable to
retail sales of natural gas and approximately 6% was attributable to
transportation services. Additionally, Minnegasco provides unregulated
services consisting of heating, ventilating and air conditioning (HVAC)
equipment and appliance sales and repair services, and home security
monitoring.

The demand for natural gas sales to, and natural gas transportation for,
residential, commercial and industrial customers is seasonal. In 2003,
approximately 74% of the total throughput of CERC's natural gas

12

distribution business occurred in the first and fourth quarters. These patterns
reflect the higher demand for natural gas for heating purposes during those
periods.

Supply and Transportation

Arkla. In 2003, Arkla purchased virtually all of its natural gas supply
pursuant to term contracts, with terms varying from a few months to three years.
Arkla's major third party suppliers in 2003 included BP America Production
Company (29%), Oneok Energy Marketing and Trading LLC (23%) CenterPoint Energy
Gas Services, Inc. (CEGS) (13%) and Conoco Phillips Company (9%). Numerous other
suppliers provided the remaining 26% of Arkla's natural gas supply requirements.
Arkla transports substantially all of its natural gas supplies under contracts
with our pipeline subsidiaries.

Entex. In 2003, Entex purchased virtually all of its natural gas supply
pursuant to term contracts, with terms varying from one to five years. Entex's
major third party suppliers in 2003 included American Electric Power Company,
Inc. (43%), Kinder Morgan, Inc. (20%), CEGS (11%), and Entergy-Koch, LP (11%).
Numerous other suppliers provided the remaining 15% of Entex's natural gas
supply requirements. Entex transports its natural gas supplies through various
interstate and intrastate pipelines under long-term contracts with terms varying
from one to five years.

Minnegasco. In 2003, Minnegasco purchased approximately 77% of its natural
gas supply pursuant to term contracts, with terms varying from a few months to
two years. Minnegasco purchased the remaining 23% of its natural gas supply on
the spot market. Minnegasco's major third party suppliers in 2003 included BP
Canada Energy Marketing (53%), Duke Energy Trading & Marketing (8%), Tenaska
Marketing Ventures (6%), Mirant Americas Energy Marketing (5%) and NG Energy
Trading (5%). Minnegasco transports its natural gas supplies through various
interstate pipelines under long-term contracts with terms varying from one to
five years.

Generally, the regulations of the states in which CERC's natural gas
distribution business operates allow it to pass through changes in the costs of
natural gas to its customers under purchased gas adjustment provisions in its
tariffs. There is, however, a timing difference between CERC's purchases of
natural gas and the ultimate recovery of these costs. Consequently, CERC may
incur carrying costs as a result of this timing difference that are not
recoverable from its customers.

Arkla and Minnegasco use various leased or owned natural gas storage
facilities to meet peak-day requirements and to manage the daily changes in
demand due to changes in weather. Minnegasco also supplements contracted
supplies and storage from time to time with stored liquefied natural gas and
propane-air plant production.

Minnegasco owns and operates an underground storage facility with a
capacity of 7.0 billion cubic feet (Bcf). It has a working capacity of 2.1 Bcf
available for use during a normal heating season and a maximum daily withdrawal
rate of 50 million cubic feet (MMcf). Minnegasco also owns nine propane-air
plants with a total capacity of 204 MMcf per day and on-site storage facilities
for 12 million gallons of propane (1.0 Bcf gas equivalent). Minnegasco owns a
liquefied natural gas facility with a 12 million-gallon liquefied natural gas
storage tank (1.0 Bcf gas equivalent) and a send-out capability of 72 MMcf per
day.

On an ongoing basis, CERC enters into contracts to provide sufficient
supplies and pipeline capacity to meet its firm customer requirements; however,
it is possible for limited service disruptions to occur from time to time due to
weather conditions, transportation constraints and other events. As a result of
these factors, supplies of natural gas may become unavailable from time to time
or prices may increase rapidly in response to temporary supply constraints or
other factors.

Commercial and Industrial Sales

CERC's commercial and industrial sales business, conducted through CEGS and
CenterPoint Energy Intrastate Gas Pipeline, provides comprehensive natural gas
products and services to commercial and industrial customers in the Gulf Coast
and Midwestern regions of the United States. Most services provided by CEGS are
not subject to rate regulation. In 2003, the commercial and industrial sales
business represented

13

over 50% of the throughput of CenterPoint Energy's Natural Gas Distribution
business segment. During that period, approximately 94% of the commercial and
industrial group's total throughput was attributable to natural gas sales; the
remainder was attributable to transportation services provided to third parties
and affiliates. For more information on CEGS's derivative instruments and
hedging activities, please read "Quantitative and Qualitative Disclosures About
Market Risk -- Commodity Price Risk From Non-Trading Activities" in Item 7A of
this report and Note 5 to our consolidated financial statements.

Assets

As of December 31, 2003, CERC owned approximately 63,000 linear miles of
gas distribution lines, varying in size from one-half inch to 24 inches in
diameter. Generally, in each of the cities, towns and rural areas served by
CERC, it owns the underground gas mains and service lines, metering and
regulating equipment located on customers' premises and the district regulating
equipment necessary for pressure maintenance. With a few exceptions, the
measuring stations at which CERC receives gas are owned, operated and maintained
by others, and its distribution facilities begin at the outlet of the measuring
equipment. These facilities, including odorizing equipment, are usually located
on the land owned by suppliers.

Competition

CERC competes primarily with alternate energy sources such as electricity
and other fuel sources. In some areas, intrastate pipelines, other gas
distributors and marketers also compete directly for gas sales to end users. In
addition, as a result of federal regulatory changes affecting interstate
pipelines, natural gas marketers operating on these pipelines may be able to
bypass CERC's facilities and market and sell and/or transport natural gas
directly to commercial and industrial customers.

PIPELINES AND GATHERING

CERC's pipelines and gathering business operates two interstate natural gas
pipelines as well as gas gathering facilities and also provides pipeline
services.

CERC's gathering operations are conducted by a wholly owned gas gathering
subsidiary, CenterPoint Energy Field Services, Inc. (CEFS). CEFS is a natural
gas gathering and processing business serving natural gas fields in the
Midcontinent basin of the United States that interconnect with CEGT's and MRT's
pipelines, as well as other interstate and intrastate pipelines. CEFS operates
gathering pipelines, which collect natural gas from approximately 200 separate
systems located in major producing fields in Arkansas, Louisiana, Oklahoma and
Texas.

In 2003, approximately 25% of our total operating revenues from pipelines
and gathering was attributable to services provided to Arkla, and approximately
10% was attributable to services to Laclede Gas Company (Laclede), an
unaffiliated distribution company that provides natural gas utility service to
the greater St. Louis metropolitan area in Illinois and Missouri. Services to
Arkla and Laclede are provided under several

14

long-term firm storage and transportation agreements. Contracts for firm
transportation in Arkla's major service areas are currently scheduled to expire
in 2005. The Arkansas Public Service Commission (APSC) is currently reviewing
Arkla's request to enter into a seven-year contract for firm transportation with
CEGT. The agreement to provide services to Laclede expires in 2007.

Our pipelines and gathering business operations may be affected by changes
in the demand for natural gas, the available supply and relative price of
natural gas in the Midcontinent and Gulf Coast natural gas supply regions and
general economic conditions.

Assets

We own and operate approximately 8,200 miles of gas transmission lines
primarily located in Missouri, Illinois, Arkansas, Louisiana, Oklahoma and
Texas. We also own and operate six natural gas storage fields with a combined
daily deliverability of approximately 1.2 Bcf per day and a combined working gas
capacity of approximately 59.0 Bcf. We also own a 10% interest in Gulf South
Pipeline Company, LP's Bistineau storage facility. This facility has a total
working gas capacity of 73.8 Bcf and approximately 1.1 Bcf per day of
deliverability. Our storage capacity in the Bistineau facility is 8 Bcf of
working gas with 100 MMcf per day of deliverability. Most of our storage
operations are in north Louisiana and Oklahoma. We also own and operate
approximately 4,300 miles of gathering pipelines that collect gas from
approximately 200 separate systems located in major producing fields in
Arkansas, Louisiana, Oklahoma and Texas.

Competition

Our pipelines and gathering business competes with other interstate and
intrastate pipelines and gathering companies in the transportation and storage
of natural gas. The principal elements of competition among pipelines are rates,
terms of service, and flexibility and reliability of service. Our pipelines and
gathering business competes indirectly with other forms of energy available to
its customers, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability of energy and pipeline
capacity, the level of business activity, conservation and governmental
regulations, the capability to convert to alternative fuels, and other factors,
including weather, affect the demand for natural gas in areas we serve and the
level of competition for transportation and storage services. In addition,
competition for our gathering operations is impacted by commodity pricing levels
because of their influence on the level of drilling activity.

OTHER OPERATIONS

Our Other Operations business segment includes office buildings and other
real estate used in our business operations and other corporate operations which
support all of our business operations.

DISCONTINUED OPERATIONS

On September 30, 2002, we distributed to our shareholders on a pro-rata
basis all of the shares of Reliant Resources common stock owned by us. The
consolidated financial statements have been prepared to reflect the effect of
this distribution. The consolidated financial statements present the Reliant
Resources businesses (Wholesale Energy, European Energy, Retail Energy and
related corporate costs) as discontinued operations in accordance with Statement
of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS No. 144). We recorded after-tax income
from discontinued operations of $475 million and $82 million for the years ended
December 31, 2001 and 2002, respectively, related to the operations of Reliant
Resources. As a result of the spin-off of Reliant Resources, we recorded a
non-cash loss on disposal of discontinued operations of $4.4 billion in 2002,
which represented the excess of the carrying value of our investment in Reliant
Resources over the market value of Reliant Resources common stock.

In February 2003, we sold our interest in Argener, a cogeneration facility
in Argentina, for $23 million. The carrying value of this investment was
approximately $11 million as of December 31, 2002. We recorded an after-tax gain
of $7 million from the sale of Argener in the first quarter of 2003. In April
2003, we sold our final remaining investment in Argentina, a 90 percent interest
in Empresa Distribuidora de Electricidad de

15

Santiago del Estero S.A. We recorded an after-tax loss of $3 million in the
second quarter of 2003 related to our Latin America operations. We have
completed our strategy of exiting all of our international investments. The
consolidated financial statements present these operations as discontinued
operations in accordance with SFAS No. 144.

In November 2003, we sold a component of our Other Operations business
segment, CenterPoint Energy Management Services (CEMS), that provides district
cooling services in the Houston, Texas central business district and related
complementary energy services to district cooling customers and others. The
assets and liabilities of this business have been classified in the Consolidated
Balance Sheets as discontinued operations. We recorded an after-tax loss of $1
million from the sale of CEMS in the fourth quarter of 2003. We recorded an
after-tax loss in discontinued operations of $16 million ($25 million pre-tax)
during the second quarter of 2003 to record the impairment of the CEMS
long-lived assets based on the impending sale and to record one-time termination
benefits. The consolidated financial statements present these operations as
discontinued operations in accordance with SFAS No. 144.

FINANCIAL INFORMATION ABOUT SEGMENTS

For financial information about our segments, see Note 16 to our
consolidated financial statements, which note is incorporated herein by
reference.

REGULATION

We are subject to regulation by various federal, state and local
governmental agencies, including the regulations described below.

PUBLIC UTILITY HOLDING COMPANY ACT OF 1935

As a registered public utility holding company, we, along with our
subsidiaries except Texas Genco, are subject to a comprehensive regulatory
scheme imposed by the SEC in order to protect customers, investors and the
public interest. Although the SEC does not regulate rates and charges under the
1935 Act, it does regulate the structure, financing, lines of business and
internal transactions of public utility holding companies and their system
companies. In order to obtain financing, acquire additional public utility
assets or stock, or engage in other significant transactions, we are required to
obtain approval from the SEC under the 1935 Act.

We received an order from the SEC under the 1935 Act on June 30, 2003 and
supplemental orders thereafter relating to our financing activities and those of
our regulated subsidiaries, as well as other matters. The orders are effective
until June 30, 2005. As of December 31, 2003, the orders generally permitted us
and our subsidiaries to issue securities to refinance indebtedness outstanding
at June 30, 2003, and authorized us and our subsidiaries to issue certain
incremental external debt securities and common and preferred stock through June
30, 2005, without prior authorization from the SEC. The orders also contain
certain requirements regarding ratings of our securities, interest rates,
maturities, issuance expenses and use of proceeds. The orders require that
CenterPoint Houston and CERC maintain a ratio of common equity to total
capitalization of at least 30%. The SEC has acknowledged that prior to the
monetization of Texas Genco and the securitization of the true-up components,
our common equity as a percentage of total capitalization is expected to remain
less than 30%. In addition, after the securitization, our common equity as a
percentage of total capitalization, including securitized debt, is expected to
be less than 30%, which the SEC has permitted for other companies.

In October 2003, the FERC granted exempt wholesale generator status to
Texas Genco, LP, a wholly owned subsidiary of Texas Genco that owns and operates
our electric generating plants. As a result of the FERC's actions, Texas Genco,
LP is exempt from all provisions of the 1935 Act as long as it remains an exempt
wholesale generator and Texas Genco is no longer a public utility holding
company within the meaning of the 1935 Act.

Pursuant to requirements of the orders, we formed a service company,
CenterPoint Energy Service Company, LLC (Service Company), that began operation
as of January 1, 2004, to provide certain corporate

16

and shared services to our subsidiaries. Those services are provided pursuant to
service arrangements that are in a form prescribed by the SEC. Services are
provided by the Service Company at cost and are subject to oversight and
periodic audit from the SEC.

FEDERAL ENERGY REGULATORY COMMISSION

The transportation and sale or resale of natural gas in interstate commerce
is subject to regulation by the FERC under the Natural Gas Act and the Natural
Gas Policy Act of 1978, as amended. The FERC has jurisdiction over, among other
things, the construction of pipeline and related facilities used in the
transportation and storage of natural gas in interstate commerce, including the
extension, expansion or abandonment of these facilities. The rates charged by
interstate pipelines for interstate transportation and storage services are also
regulated by the FERC.

Our natural gas pipeline subsidiaries may periodically file applications
with the FERC for changes in their generally available maximum rates and charges
designed to allow them to recover their costs of providing service to customers
(to the extent allowed by prevailing market conditions), including a reasonable
rate of return. These rates are normally allowed to become effective after a
suspension period and, in some cases, are subject to refund under applicable law
until such time as the FERC issues an order on the allowable level of rates.

On November 25, 2003, the FERC issued Order No. 2004, the final rule
modifying the Standards of Conduct applicable to electric and natural gas
transmission providers, governing the relationship between regulated
transmission providers and certain of their affiliates. The rule significantly
changes and expands the regulatory burdens of the Standards of Conduct and
applies essentially the same standards to jurisdictional electric transmission
providers and natural gas pipelines. On February 9, 2004, our natural gas
pipeline subsidiaries filed Implementation Plans required under the new rule.
Those subsidiaries are further required to post their Implementation Procedures
on their websites by June 1, 2004, and to be in compliance with the requirements
of the new rule by that date.

CenterPoint Houston is not a "public utility" under the Federal Power Act
and therefore is not generally regulated by the FERC, although certain of its
transactions are subject to limited FERC jurisdiction. Texas Genco makes
electric sales wholly within ERCOT and, as a result, its rates are not subject
to regulation as a "public utility" under the Federal Power Act.

STATE AND LOCAL REGULATION

Electric Transmission and Distribution. CenterPoint Houston conducts its
operations pursuant to a certificate of convenience and necessity issued by the
Texas Utility Commission that covers its present service area and facilities. In
addition, CenterPoint Houston holds non-exclusive franchises, typically having a
term of forty years, from the incorporated municipalities in its service
territory. These franchises give CenterPoint Houston the right to construct,
operate and maintain its transmission and distribution system within the streets
and public ways of these municipalities for the purpose of delivering electric
service to the municipality, its residents and businesses in exchange for
payment of a fee. The franchise for the City of Houston is scheduled to expire
in 2007.

All retail electric providers in CenterPoint Houston's service area pay the
same rates and other charges for transmission and distribution services.

CenterPoint Houston's distribution rates charged to retail electric
providers for residential customers are based on amounts of energy delivered
whereas distribution rates for a majority of commercial and industrial customers
are based on peak demand. Transmission rates charged to other distribution
companies are based on amounts of energy transmitted under "postage stamp" rates
that do not vary with the distance the energy is being transmitted. All
distribution companies in ERCOT pay CenterPoint Houston the same rates and other
charges for transmission services. The current transmission and distribution
rates for CenterPoint Houston have been in effect since January 1, 2002, when
electric competition began. This regulated delivery charge includes the
transmission and distribution rate (which includes costs for nuclear
decommissioning and

17

municipal franchise fees), a system benefit fund fee imposed by the Texas
electric restructuring law, a transition charge associated with securitization
of regulatory assets and an excess mitigation credit imposed by the Texas
Utility Commission.

Natural Gas Distribution. In almost all communities in which CERC provides
natural gas distribution services, it operates under franchises, certificates or
licenses obtained from state and local authorities. The terms of the franchises,
with various expiration dates, typically range from 10 to 30 years, though
franchises in Arkansas are perpetual. None of CERC's material franchises expire
in the near term. CERC expects to be able to renew expiring franchises. In most
cases, franchises to provide natural gas utility services are not exclusive.

Substantially all of CERC's retail natural gas sales by its local
distribution divisions are subject to traditional cost-of-service regulation at
rates regulated by the relevant state public utility commissions and, in Texas,
by the Railroad Commission of Texas (Railroad Commission) and municipalities
CERC serves.

In August 2002, a settlement was approved by the APSC that resulted in an
increase in the base rate and service charge revenues of Arkla of approximately
$27 million annually. In addition, the APSC approved a gas main replacement
surcharge that provided $2 million of additional revenue in 2003 and is expected
to provide additional amounts in subsequent years. In December 2002, a
settlement was approved by the Oklahoma Corporation Commission that resulted in
an increase in the base rate and service charge revenues of Arkla of
approximately $6 million annually. In November 2003, Arkla filed a request with
the Louisiana Public Service Commission (LPSC) for a $16 million increase to its
base rate and service charge revenues in Louisiana. The case is expected to be
resolved in mid-2004.

In December 2003, a settlement was approved by the City of Houston that
will result in an increase in the base rate and service charge revenues of Entex
of approximately $7 million annually. Entex has submitted these settlement rates
to the 28 other cities within its Houston Division and the Railroad Commission
of Texas for consideration and approval. If all regulatory approvals are
received from these 29 jurisdictions, Entex's base rate and service charge
revenues are expected to increase by approximately $7 million annually in
addition to the $7 million discussed above. On February 10, 2004, a settlement
was approved by the LPSC that is expected to result in an increase in Entex's
base rate and service charge revenues of approximately $2 million annually.

Our gas distribution divisions generally recover the cost of gas provided
to customers through gas cost adjustment mechanisms prescribed in their tariffs
that are approved by the appropriate regulatory authority. Recently, our Arkla
and Entex divisions have been involved in both litigation and regulatory
proceedings in which parties have challenged the gas costs that have been
recovered from customers. In response to a claim by the City of Tyler, Texas
that excessive costs, ranging from $2.8 million to $39.2 million, may have been
incurred for gas purchased by Entex for resale to residential and small
commercial customers, Entex and the City of Tyler have requested that the
Railroad Commission determine whether Entex has properly and lawfully charged
and collected for gas service to its residential and commercial customers in its
Tyler distribution system for the period beginning November 1, 1992, and ending
October 31, 2002. Similarly, a complaint has been filed with the LPSC by a
private party alleging that certain gas costs recovered from Entex customers in
Louisiana were excessive and/or were not properly authorized by the LPSC.
Additionally, certain private litigants have filed suit in Louisiana state
courts, alleging that inappropriate or excessive gas costs have been recovered
from Arkla's customers.

NUCLEAR REGULATORY COMMISSION

Texas Genco is subject to regulation by the United States Nuclear
Regulatory Commission (NRC) with respect to the operation of the South Texas
Project. This regulation involves testing, evaluation and modification of all
aspects of plant operation in light of NRC safety and environmental
requirements. Continuous demonstrations to the NRC that plant operations meet
applicable requirements are also required. The NRC has the ultimate authority to
determine whether any nuclear powered generating unit may operate.

18

Texas Genco and the other owners of the South Texas Project are required by
NRC regulations to estimate from time to time the amounts required to
decommission that nuclear generating facility and are required to maintain funds
to satisfy that obligation when the plant ultimately is decommissioned.
CenterPoint Houston currently collects through its electric rates amounts
calculated to provide sufficient funds at the time of decommissioning to
discharge these obligations. Funds collected are deposited into nuclear
decommissioning trusts. The beneficial ownership of the nuclear decommissioning
trusts is held by Texas Genco, as a licensee of the facility. While current
funding levels exceed NRC minimum requirements, no assurance can be given that
the amounts held in trust will be adequate to cover the actual decommissioning
costs of the South Texas Project. Such costs may vary because of changes in the
assumed date of decommissioning and changes in regulatory requirements,
technology and costs of labor, materials and waste burial. In the event that
funds from the trust are inadequate to decommission the facilities, CenterPoint
Houston will be required to collect through rates or other authorized charges
all additional amounts required to fund Texas Genco's obligations relating to
the decommissioning of the South Texas Project.

DEPARTMENT OF TRANSPORTATION

In December 2002, Congress enacted the Pipeline Safety Improvement Act of
2002 (the Act). This legislation applies to our interstate pipelines as well as
our intrastate pipelines and local distribution companies. The legislation
imposes several requirements related to ensuring pipeline safety and integrity.
It requires pipeline and distribution companies to assess the integrity of their
pipeline transmission facilities in areas of high population concentration or
High Consequence Areas (HCA). The legislation further requires companies to
perform remediation activities, in accordance with the requirements of the
legislation over a 10-year period.

In December 2003, the Department of Transportation Office of Pipeline
Safety issued the final regulations to implement the Act. These regulations
became effective on February 14, 2004. These regulations provided guidance on,
among other things, the areas that should be classified as HCA.

Our Pipelines and Gathering business segment and our natural gas
distribution companies anticipate that compliance with the new regulations will
require increases in both capital and operating cost. The level of expenditures
required to comply with these regulations will be dependent on several factors,
including the age of the facility, the pressures at which the facility operates
and the number of facilities deemed to be located in areas designated as HCA.
Based on our interpretation of the rules and preliminary technical reviews, we
anticipate compliance will require average annual expenditures of approximately
$15 to $20 million during the initial 10-year period.

ENVIRONMENTAL MATTERS

We are subject to a number of federal, state and local laws and regulations
relating to the protection of the environment and the safety and health of
company personnel and the public. These requirements relate to a broad range of
our activities, including:

- the discharge of pollutants into the air, water and soil;

- the identification, generation, storage, handling, transportation,
disposal, record keeping, labeling and reporting of, and the emergency
response in connection with, hazardous and toxic materials and wastes,
including asbestos, associated with our operations;

- noise emissions from our facilities; and

- safety and health standards, practices and procedures that apply to the
workplace and the operation of our facilities.

19

In order to comply with these requirements, we may need to spend
substantial amounts and devote other resources from time to time to:

- clean up or decommission waste disposal areas, fuel storage and
management facilities, and other locations and facilities, including
generation facilities.

If we do not comply with environmental requirements that apply to our
operations, regulatory agencies could seek to impose on us civil, administrative
and/or criminal liabilities as well as seek to curtail our operations. Under
some statutes, private parties could also seek to impose upon us civil fines or
liabilities for property damage, personal injury and possibly other costs.

Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), owners and operators of facilities from which
there has been a release or threatened release of hazardous substances, together
with those who have transported or arranged for the disposal of those
substances, are liable for:

- the costs of responding to that release or threatened release; and

- the restoration of natural resources damaged by any such release.

AIR EMISSIONS

As part of the 1990 amendments to the Federal Clean Air Act, requirements
and schedules for compliance were developed for attainment of health-based
standards. In furtherance of the Act's requirements, standards for NOx
emissions, a product of the combustion process associated with power generation,
have been finalized by the Texas Commission on Environmental Quality (TCEQ).
These TCEQ standards, as well as provisions of the Texas electric restructuring
law, require substantial reductions in NOx emissions from electric generating
units. Texas Genco is currently installing cost-effective controls at its
generating plants to comply with these requirements. As of December 31, 2003,
Texas Genco has invested $664 million for NOx emissions controls and is planning
to make expenditures of $131 million for the remainder of 2004 through 2007.
Further revisions to these NOx standards may result from the TCEQ's future
rules, expected by 2007, implementing more stringent federal eight-hour ozone
standards.

In 1998, the United States became a signatory to the United Nations
Framework Convention on Climate Change (Kyoto Protocol). The Kyoto Protocol
calls for developed nations to reduce their emissions of greenhouse gases.
Carbon dioxide, which is a major byproduct of the combustion of fossil fuel, is
considered to be a greenhouse gas. In 2002, President Bush withdrew the United
States' support for the Kyoto Protocol while endorsing voluntary greenhouse gas
reduction measures. Congress has also explored a number of other alternatives
for regulating domestic greenhouse gas emissions. If the country re-enters and
the United States Senate ultimately ratifies the Kyoto Protocol and/or if the
United States Congress adopts other measures for the control of greenhouse
gases, any resulting limitations on power plant carbon dioxide emissions could
have a material adverse impact on all fossil fuel-fired electric generating
facilities, including those belonging to Texas Genco.

In July 2002, the White House sent to the United States Congress a Bill
proposing the Clear Skies Act, which is designed to achieve long-term reductions
of multiple pollutants produced from fossil fuel-fired power plants. If enacted,
the Clear Skies Act would target reductions averaging 70% for sulfur dioxide
(SO(2)), NOx and mercury emissions and would create a gradually imposed
market-based compliance program that would come into effect initially in 2008
with full compliance required by 2018. Fossil fuel-fired power plants owned by
companies such as Texas Genco would be affected by the adoption of this program,
or other legislation currently pending in Congress addressing similar issues. To
comply with such programs, we and other regulated entities could pursue a
variety of strategies, including the installation of pollution controls,
purchase

20

of emission allowances, or the curtailment of operations. To date, Congress has
taken little action to enact the Clear Skies Act.

In response to Congressional inaction on the proposed Clear Skies Act, the
Environmental Protection Agency (EPA) in December 2003 proposed the Interstate
Air Quality Rule, which would require reductions in NOx and SO(2) similar to
those found in the Clear Skies Act. However, in contrast to the Clear Skies Act,
the Interstate Air Quality Rule affects emissions in 29 states in the eastern
U.S., including Texas. As with the Clear Skies Act, emissions are reduced in two
phases, and the reduction targets are similar, but are effective in 2010 and
2015 for both NOx and SO(2). EPA has announced an intent to finalize these rules
in late 2004 or early 2005.

In December 2003, EPA proposed two alternatives for regulating emissions of
mercury from coal-fired power plants in the U.S. A final rulemaking is scheduled
to be adopted in December 2004. Under the first option, the EPA would set
Maximum Achievable Control Technology (MACT) standards under Section 112 of the
Clean Air Act, which would require mercury reductions on a facility-by-facility
basis regardless of cost. The MACT standard requires reductions to be achieved
by 2008, although it is possible that this compliance date will be delayed. The
second option would regulate coal-fired power plants under Section 111 of the
Clean Air Act. Under this option, similar mercury reductions would be achieved
on a national scale through a cap-and-trade program, allowing reductions to be
made at the most economical locations, and not requiring reductions on a
facility-by-facility basis. The MACT standard would require a reduction of about
30% from coal-fired facilities, which will require the installation of control
equipment. The cap-and-trade rule would require deeper reductions, but may be
more economical because it allows trading of emissions among facilities. The
mercury cap-and-trade rule would be accomplished in two phases, in 2010 and
2015, with reduction levels set at approximately 50% and 70%, respectively. The
cost of complying with the final rules is not yet known but is likely to be
material.

In addition to mercury control from coal-fired boilers, the MACT rule, if
adopted, would require the control of nickel emissions from oil-fired
facilities. At this point, the impact of this proposal is uncertain, but is not
expected to significantly affect our operations.

The EPA has also issued MACT standards for sources other than boilers used
for power generation. The MACT rule for combustion turbines was issued in August
2003 and there is no impact on our existing facilities. The MACT rulemaking for
engines and industrial boilers was issued in February 2004. These rules are not
expected to have a significant impact on Texas Genco's operations.

WATER

On February 16, 2004, the EPA signed final rules under Section 316(b) of
the Clean Water Act relating to the design and operation of existing cooling
water intake structures. The requirements to achieve compliance with this rule
are subject to various factors, including the results of anticipated litigation,
but we currently do not expect any capital expenditures required for compliance
to be material.

The EPA and State of Texas periodically modify water quality standards and,
where necessary, initiate total maximum daily load allocations for water-bodies
not meeting those standards. Such actions could cause our facilities to incur
significant costs to comply with revised discharge permit limitations.

NUCLEAR WASTE

Under the U.S. Nuclear Waste Policy Act of 1982, the federal government was
to create a federal repository for spent nuclear fuel produced by nuclear plants
like the South Texas Project. Also pursuant to that legislation a special
assessment has been imposed on those nuclear plants to pay for the facility.
Consistent with the Act, owners of nuclear facilities, including Texas Genco and
the other owners of the South Texas Project, entered into contracts setting out
the obligations of the owners and U.S. Department of Energy (DOE). Since 1998,
DOE has been in default on its obligations to begin moving spent nuclear fuel
from reactors to the federal repository (which still is not completed). On
January 28, 2004, Texas Genco and the

21

other owners of the South Texas Project, along with owners of other nuclear
plants, filed a breach of contract suit against DOE in order to protect against
the running of a statute of limitations.

LIABILITY FOR PREEXISTING CONDITIONS AND REMEDIATION

Asbestos and Other. As a result of their age, many of our facilities
contain significant amounts of asbestos insulation, other asbestos-containing
materials and lead-based paint. Existing state and federal rules require the
proper management and disposal of these potentially toxic materials. We have
developed a management plan that includes proper maintenance of existing
non-friable asbestos installations, and removal and abatement of asbestos
containing materials where necessary because of maintenance, repairs,
replacement or damage to the asbestos itself. We have planned for the proper
management, abatement and disposal of asbestos and lead-based paint at our
facilities.

We have been named, along with numerous others, as a defendant in a number
of lawsuits filed by a large number of individuals who claim injury due to
exposure to asbestos while working at sites along the Texas Gulf Coast. Most of
these claimants have been third party workers who participated in construction
of various industrial facilities, including power plants, and some of the
claimants have worked at locations owned by us. We anticipate that additional
claims like those received may be asserted in the future, and we intend to
continue our practice of vigorously contesting claims that we do not consider to
have merit.

Hydrocarbon Contamination. CERC Corp. and certain of its subsidiaries are
among some of the defendants in lawsuits filed beginning in August 2001 in Caddo
Parish and Bossier Parish, Louisiana. The suits allege that, at some unspecified
date prior to 1985, the defendants allowed or caused hydrocarbon or chemical
contamination of the Wilcox Aquifer, which lies beneath property owned or leased
by certain of the defendants and which is the sole or primary drinking water
aquifer in the area. The primary source of the contamination is alleged by the
plaintiffs to be a gas processing facility in Haughton, Bossier Parish,
Louisiana known as the "Sligo Facility," which was formerly operated by a
predecessor in interest of CERC Corp. This facility was purportedly used for
gathering natural gas from surrounding wells, separating gasoline and
hydrocarbons from the natural gas for marketing, and transmission of natural gas
for distribution.

Beginning about 1985, the predecessors of certain CERC Corp. defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they owned or leased. This work has been done in
conjunction with and under the direction of the Louisiana Department of
Environmental Quality. The plaintiffs seek monetary damages for alleged damage
to the aquifer underlying their property, unspecified alleged personal injuries,
alleged fear of cancer, alleged property damage or diminution of value of their
property, and, in addition, seek damages for trespass, punitive, and exemplary
damages. The quantity of monetary damages sought is unspecified. The Company is
unable to estimate the monetary damages, if any, that the plaintiffs may be
awarded in these matters.

Manufactured Gas Plant Sites. CERC and its predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, remediation has been
completed on two sites, other than ongoing monitoring and water treatment. There
are five remaining sites in CERC's Minnesota service territory, two of which
CERC believes were neither owned nor operated by CERC, and for which CERC
believes it has no liability.

At December 31, 2003, CERC had accrued $19 million for remediation of
certain Minnesota sites. At December 31, 2003, the estimated range of possible
remediation costs for these sites was $8 million to $44 million based on
remediation continuing for 30 to 50 years. The cost estimates are based on
studies of a site or industry average costs for remediation of sites of similar
size. The actual remediation costs will be dependent upon the number of sites to
be remediated, the participation of other potentially responsible parties (PRP),
if any, and the remediation methods used. CERC has utilized an environmental
expense tracker mechanism in its rates in Minnesota to recover estimated costs
in excess of insurance recovery. CERC has collected or accrued $12.5 million as
of December 31, 2003 to be used for environmental remediation.

CERC has received notices from the United States Environmental Protection
Agency and others regarding its status as a PRP for other sites. CERC has been
named as a defendant in lawsuits under which contribution is sought for the cost
to remediate former MGP sites based on the previous ownership of such

22

sites by former affiliates of CERC or its divisions. We are investigating
details regarding these sites and the range of environmental expenditures for
potential remediation. Based on current information, we have not been able to
quantify a range of environmental expenditures for such sites.

Mercury Contamination. Our pipeline and distribution operations have in
the past employed elemental mercury in measuring and regulating equipment. It is
possible that small amounts of mercury may have been spilled in the course of
normal maintenance and replacement operations and that these spills may have
contaminated the immediate area with elemental mercury. This type of
contamination has been found by us at some sites in the past, and we have
conducted remediation at these sites. It is possible that other contaminated
sites may exist and that remediation costs may be incurred for these sites.
Although the total amount of these costs cannot be known at this time, based on
our experience and that of others in the natural gas industry to date and on the
current regulations regarding remediation of these sites, we believe that the
costs of any remediation of these sites will not be material to our financial
condition, results of operations or cash flows.

Other Environmental. From time to time, we have received notices from
regulatory authorities or others regarding our status as a PRP in connection
with sites found to require remediation due to the presence of environmental
contaminants. Although their ultimate outcome cannot be predicted at this time,
we do not believe, based on our experience to date, that these matters, either
individually or in the aggregate, will have a material adverse effect on our
financial condition, results of operations or cash flows.

EMPLOYEES

As of December 31, 2003, we had 11,046 full-time employees. The following
table sets forth the number of our employees by business segment:

As of December 31, 2003, approximately 35% of the Company's employees are
subject to collective bargaining agreements. Three of these agreements, covering
approximately 14% of the Company's employees, have expired or will expire in
2004.

The 1,030 bargaining unit employees of Texas Genco were covered by a
collective bargaining unit agreement with the International Brotherhood of
Electrical Workers Local 66 that expired in September 2003. These bargaining
unit employees have continued to work without interruption and Texas Genco has
not had any work interruptions since 1976. Texas Genco continues to have a good
relationship with the bargaining unit and is actively negotiating to obtain a
new agreement in 2004.

The Minnegasco division of our natural gas distribution business has 512
bargaining unit employees that are covered by collective bargaining unit
agreements that have expired or will expire in 2004. An agreement with the
International Brotherhood of Electrical Workers Local 949, which expired in
December 2003, was renegotiated in February 2004 covering 267 of these
employees. The remaining 245 employees are covered by a collective bargaining
agreement with the Office and Professional Employees International Union Local
12, which expires in May 2004.

DAVID M. MCCLANAHAN has been President and Chief Executive Officer and a
director of CenterPoint Energy since September 2002. He served as Vice Chairman
of Reliant Energy from October 2000 to September 2002 and as President and Chief
Operating Office of Reliant Energy's Delivery Group from April 1999 to September
2002. He also served as the President and Chief Operating Officer of Reliant
Energy HL&P, the electric utility division of Reliant Energy, from 1997 to 1999.
He has served in various executive capacities with CenterPoint Energy since
1986. He previously served as Chairman of the Board of Directors of ERCOT and
Chairman of the Board of the University of St. Thomas. He currently serves on
the boards of the Edison Electric Institute and the American Gas Association.

SCOTT E. ROZZELL has served as Executive Vice President, General Counsel
and Corporate Secretary of CenterPoint Energy since September 2002. He served as
Executive Vice President and General Counsel of the Delivery Group of Reliant
Energy from March 2001 to September 2002. Before joining CenterPoint Energy in
2001, Mr. Rozzell was a senior partner in the law firm of Baker Botts L.L.P.

STEPHEN C. SCHAEFFER has served as Executive Vice President and Group
President, Gas Distribution Sales and Service, since December 2002. From
September 2002 to December 2002, he served as Executive Vice
President-Government and Regulatory Affairs of CenterPoint Energy. Prior to this
position, Mr. Schaeffer served as Senior Vice President-Regulatory of Reliant
Energy beginning in 1999. From 1997 to 1998, he served as Executive Vice
President-Retail Energy Regulation of Reliant Energy's Retail Energy Group. He
has served in various executive capacities with CenterPoint Energy since 1989.

GARY L. WHITLOCK has served as Executive Vice President and Chief Financial
Officer of CenterPoint Energy since September 2002. He served as Executive Vice
President and Chief Financial Officer of the Delivery Group of Reliant Energy
from July 2001 to September 2002. Mr. Whitlock served as the Vice President,
Finance and Chief Financial Officer of Dow AgroSciences, a subsidiary of The Dow
Chemical Company, from 1998 to 2001.

JAMES S. BRIAN has served as Senior Vice President and Chief Accounting
Officer of CenterPoint Energy since August 2002. He served as Senior Vice
President, Finance and Administration of the Delivery Group of Reliant Energy
from 1999 to August 2002, and as Vice President and Chief Financial Officer of
Reliant Energy HL&P from 1997 to 1999. Mr. Brian has served in various executive
capacities with CenterPoint Energy since 1983.

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BYRON R. KELLEY has served as President and Chief Operating Officer of
CenterPoint Energy Pipelines and Field Services since May 2003. Prior to joining
CenterPoint Energy he served as President of El Paso International, a subsidiary
of El Paso Corporation, for January 2001 to August 2002 and as Executive Vice
President of Development, Operations and Engineering from March 1999 through
December 2000. He currently serves on the Board of Directors of the Interstate
Natural Gas Association of America.

THOMAS R. STANDISH has served as President and Chief Operating Officer of
CenterPoint Houston since August 2002. He served as President and Chief
Operating Officer for both electricity and natural gas for Reliant Energy's
Houston area from 1999 until August 2002, and as Senior Vice President of
Distribution Customer Service for Reliant Energy HL&P from 1997 to 1999. Mr.
Standish has served in various executive capacities with CenterPoint Energy
since 1993. He currently serves on the Board of Directors of ERCOT.

DAVID G. TEES has served as President and Chief Executive Officer of Texas
Genco since August 2002. He served as Senior Vice President, Generation
Operations of Reliant Energy from 1998 through August 2002. He also served as
Vice President of Energy Production of Reliant Energy HL&P from 1986 to 1998.
Mr. Tees has also served on the executive committee of the Edison Electric
Institute Energy Supply Subcommittee and currently represents CenterPoint Energy
as a Research Advisory Committee Member of the Electric Power Research Institute
and is a director of the South Texas Project Nuclear Operating Company.

CENTERPOINT HOUSTON MAY NOT BE SUCCESSFUL IN RECOVERING THE FULL VALUE OF ITS

TRUE-UP COMPONENTS.

CenterPoint Houston expects to make a filing on March 31, 2004 in a true-up
proceeding provided for by the Texas electric restructuring law. The purpose of
this proceeding will be to quantify and reconcile the following costs or true-up
components:

- "stranded costs," which consist of the positive excess of the regulatory
net book value of generation assets, as defined, over the market value of
the assets;

- the difference between the Texas Utility Commission's projected market
prices for generation during 2002 and 2003 and the actual market prices
for generation as determined in the state-mandated capacity auctions
during that period;

- the Texas jurisdictional amount reported by the previously vertically
integrated electric utilities as generation-related regulatory assets and
liabilities (offset and adjusted by specified amounts) in their audited
financial statements for 1998;

- final fuel over- or under-recovery; less

- "price to beat" clawback components.

CenterPoint Houston will be required to establish and support the amounts
it seeks to recover in the 2004 True-Up Proceeding. CenterPoint Houston expects
these amounts to be substantial. Third parties will have the opportunity and are
expected to challenge CenterPoint Houston's calculation of these amounts. To the
extent recovery of a portion of these amounts is denied or if we agree to forego
recovery of a portion of the request under a settlement agreement, CenterPoint
Houston would be unable to recover those amounts in the future. Additionally, in
October 2003, a group of intervenors filed a petition asking the Texas Utility
Commission to open a rulemaking proceeding and reconsider certain aspects of its
true-up rules. In November 2003, the Texas Utility Commission voted to deny the
petition. Despite the denial of the petition, we expect that issues could be
raised in the 2004 True-Up Proceeding regarding our compliance with the Texas
Utility Commission's rules regarding ECOM recovery, including whether Texas
Genco has auctioned all capacity it is required to auction in view of the fact
that some capacity has failed to sell in the state-mandated auctions. We believe
Texas Genco has complied with the requirements under the applicable rules,
including re-offering the unsold capacity in subsequent auctions. If events were
to occur during the 2004 True-Up Proceeding that made the recovery of the ECOM
true-up regulatory asset no longer probable, we would write off the
unrecoverable balance of such asset as a charge against earnings.

In the event CenterPoint Houston has not begun to recover the amounts
established in the 2004 True-Up Proceeding prior to its $1.3 billion term loan
maturity date in November 2005, CenterPoint Houston's ability to repay or
refinance this term loan may be adversely affected.

The Texas Utility Commission's ruling that the 2004 True-Up Proceeding
filing will be made on March 31, 2004 means that the calculation of the market
value of a share of Texas Genco common stock for purposes of the Texas Utility
Commission's stranded cost determination will be based on market prices during
the 120 trading days ending on March 30, 2004 plus a control premium, if any, up
to a maximum of 10%. If Texas Genco is sold to a third party at a lower price
than the market value used by the Texas Utility Commission, CenterPoint Houston
would be unable to recover the difference.

CENTERPOINT HOUSTON'S RECEIVABLES ARE CONCENTRATED IN A SMALL NUMBER OF RETAIL

ELECTRIC PROVIDERS.

CenterPoint Houston's receivables from the distribution of electricity are
collected from retail electric providers that supply the electricity CenterPoint
Houston distributes to their customers. Currently, CenterPoint Houston does
business with approximately 43 retail electric providers. Adverse economic

26

conditions, structural problems in the new ERCOT market or financial
difficulties of one or more retail electric providers could impair the ability
of these retail providers to pay for CenterPoint Houston's services or could
cause them to delay such payments. CenterPoint Houston depends on these retail
electric providers to remit payments on a timely basis. Any delay or default in
payment could adversely affect CenterPoint Houston's cash flows, financial
condition and results of operations. Reliant Resources, through its
subsidiaries, is CenterPoint Houston's largest customer. Approximately 70% of
CenterPoint Houston's $83 million in billed receivables from retail electric
providers at December 31, 2003 was owed by subsidiaries of Reliant Resources.
Pursuant to the Texas electric restructuring law, Reliant Resources will be
obligated to make a "price to beat" clawback payment to CenterPoint Houston in
2004 which is currently estimated by Reliant Resources to be $175 million.
CenterPoint Houston's financial condition may be adversely affected if Reliant
Resources is unable to meet these obligations.

RATE REGULATION OF CENTERPOINT HOUSTON'S BUSINESS MAY DELAY OR DENY

CENTERPOINT HOUSTON'S FULL RECOVERY OF ITS COSTS.

CenterPoint Houston's rates are regulated by certain municipalities and the
Texas Utility Commission based on an analysis of its invested capital and its
expenses incurred in a test year. Thus, the rates that CenterPoint Houston is
allowed to charge may not match its expenses at any given time. While rate
regulation in Texas is premised on providing a reasonable opportunity to recover
reasonable and necessary operating expenses and to earn a reasonable return on
its invested capital, there can be no assurance that the Texas Utility
Commission will judge all of CenterPoint Houston's costs to be reasonable or
necessary or that the regulatory process in which rates are determined will
always result in rates that will produce full recovery of CenterPoint Houston's
costs.

DISRUPTIONS AT POWER GENERATION FACILITIES OWNED BY THIRD PARTIES COULD
INTERRUPT CENTERPOINT HOUSTON'S SALES OF TRANSMISSION AND DISTRIBUTION
SERVICES.

CenterPoint Houston depends on power generation facilities owned by third
parties to provide retail electric providers with electric power which it
transmits and distributes to customers of the retail electric providers.
CenterPoint Houston does not own or operate any power generation facilities. If
power generation is disrupted or if power generation capacity is inadequate,
CenterPoint Houston's services may be interrupted, and its results of
operations, financial condition and cash flows may be adversely affected.

CENTERPOINT HOUSTON'S REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.

A portion of CenterPoint Houston's revenues is derived from rates that it
collects from each retail electric provider based on the amount of electricity
it distributes on behalf of such retail electric provider. Thus, CenterPoint
Houston's revenues and results of operations are subject to seasonality, weather
conditions and other changes in electricity usage, with revenues being higher
during the warmer months.

RISK FACTORS AFFECTING OUR ELECTRIC GENERATION BUSINESS

TEXAS GENCO'S REVENUES AND RESULTS OF OPERATIONS ARE IMPACTED BY MARKET RISKS

THAT ARE BEYOND ITS CONTROL.

Texas Genco sells electric generation capacity, energy and ancillary
services in the ERCOT market. The ERCOT market consists of the majority of the
population centers in Texas and represents approximately 85% of the demand for
power in the state. Under the Texas electric restructuring law, Texas Genco and
other power generators in Texas are not subject to traditional cost-based
regulation and, therefore, may sell electric generation capacity, energy and
ancillary services to wholesale purchasers at prices determined by the market.
As a result, Texas Genco is not guaranteed any rate of return on its capital
investments through mandated rates, and its revenues and results of operations
depend, in large part, upon prevailing market prices for electricity in the
ERCOT market. Market prices for electricity, generation capacity, energy and
ancillary services may fluctuate substantially. Texas Genco's gross margins are
primarily derived from the sale of capacity entitlements associated with its
large, solid fuel base-load generating units, including its coal and

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lignite fueled generating stations and its interest in the South Texas Project
nuclear generating station. The gross margins generated from payments associated
with the capacity of these units are directly impacted by natural gas prices.
Since the fuel costs for Texas Genco's base-load units are largely fixed under
long-term contracts, they are generally not subject to significant daily and
monthly fluctuations. However, the market price for power in the ERCOT market is
directly affected by the price of natural gas. Because natural gas is the
marginal fuel for facilities serving the ERCOT market during most hours, its
price has a significant influence on the price of electric power. As a result,
the price customers are willing to pay for entitlements to Texas Genco's solid
fuel-fired base-load capacity generally rises and falls with natural gas prices.

Market prices in the ERCOT market may also fluctuate substantially due to
other factors. Such fluctuations may occur over relatively short periods of
time. Volatility in market prices may result from:

- oversupply or undersupply of generation capacity,

- power transmission or fuel transportation constraints or inefficiencies,

- federal and state energy and environmental regulation and legislation.

THERE IS CURRENTLY A SURPLUS OF GENERATING CAPACITY IN THE ERCOT MARKET AND WE

EXPECT THE MARKET FOR WHOLESALE POWER TO BE HIGHLY COMPETITIVE.

The amount by which power generating capacity exceeds peak demand (reserve
margin) in the ERCOT market has exceeded 30% since 2001, and the Texas Utility
Commission and the ERCOT Independent System Operator (ISO) have forecasted the
reserve margin for 2004 to continue to exceed 30%. The commencement of
commercial operation of new power generation facilities in the ERCOT market has
increased and will continue to increase the competitiveness of the wholesale
power market, which could have a material adverse effect on Texas Genco's
results of operations, financial condition, cash flows and the market value of
Texas Genco's assets.

Texas Genco's competitors include generation companies affiliated with
Texas-based utilities, independent power producers, municipal and co-operative
generators and wholesale power marketers. The unbundling of vertically
integrated utilities into separate generation, transmission and distribution,
and retail businesses pursuant to the Texas electric restructuring law could
result in a significant number of additional competitors participating in the
ERCOT market. Some of Texas Genco's competitors may have greater financial
resources, lower cost structures, more effective risk management policies and
procedures, greater ability to incur losses, greater potential for profitability
from ancillary services, and greater flexibility in the timing of their sale of
generating capacity and ancillary services than Texas Genco does.

TEXAS GENCO IS SUBJECT TO OPERATIONAL AND MARKET RISKS ASSOCIATED WITH ITS

CAPACITY AUCTIONS.

Texas Genco has sold entitlements to a significant portion of its available
2004 and 2005 generating capacity in its capacity auctions held to date.
Although Texas Genco's obligation to conduct contractually-

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mandated auctions terminated in January 2004, it currently remains obligated to
sell 15% of its installed generation capacity and related ancillary services
pursuant to state-mandated auctions and it expects to conduct future capacity
auctions with respect to all or part of its remaining capacity from time to
time. In these auctions, Texas Genco sold firm entitlements on a forward basis
to capacity and ancillary services dispatched within specified operational
constraints. Although Texas Genco has reserved a portion of its aggregate net
generation capacity from its capacity auctions for planned or forced outages at
its facilities, unanticipated plant outages or other problems with its
generation facilities could result in its firm capacity and ancillary services
commitments exceeding its available generation capacity. As a result, an
unexpected outage at one of Texas Genco's lower-cost facilities could require it
to run one of its higher-cost plants or obtain replacement power from third
parties in the open market in order to satisfy its obligations even though the
energy payments for the dispatched power are based on the cost of its lower-cost
facilities.

THE OPERATION OF TEXAS GENCO'S POWER GENERATION FACILITIES INVOLVES RISKS THAT
COULD ADVERSELY AFFECT ITS REVENUES, COSTS, RESULTS OF OPERATIONS, FINANCIAL
CONDITION AND CASH FLOWS.

Texas Genco is subject to various risks associated with operating its power
generation facilities, any of which could adversely affect its revenues, costs,
results of operations, financial condition and cash flows. These risks include:

- limitations that may be imposed by regulatory requirements, including,
among others, environmental standards,

- limitations imposed by the ERCOT ISO,

- violations of permit limitations,

- operator error, and

- catastrophic events such as fires, hurricanes, explosions, floods,
terrorist attacks or other similar occurrences.

A significant portion of Texas Genco's facilities were constructed many
years ago. Older generation equipment, even if maintained in accordance with
good engineering practices, may require significant capital expenditures to keep
it operating at high efficiency and to meet regulatory requirements. This
equipment is also likely to require periodic upgrading and improvement. Any
unexpected failure to produce power, including failure caused by breakdown or
forced outage, could result in increased costs of operations and reduced
earnings.

In December 2003, one of the three auxiliary standby diesel generators for
Unit 2 at the South Texas Project failed during a routine test. The NRC allowed
continued operation of Unit 2 while repairs to the generator were made. Repairs
are expected to be completed before the end of a scheduled refueling outage on
the unit in the spring of 2004. Should Unit 2 experience an unplanned shutdown
prior to its scheduled outage, there is a risk that the NRC would not permit
restarting the unit until the diesel generator was fully repaired. Texas Genco's
share of the ultimate cost of repairs to the diesel generator is estimated to be
approximately $5 million and is expected to be substantially covered by
insurance.

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TEXAS GENCO RELIES ON POWER TRANSMISSION FACILITIES THAT IT DOES NOT OWN OR
CONTROL AND THAT ARE SUBJECT TO TRANSMISSION CONSTRAINTS WITHIN THE ERCOT
MARKET. IF THESE FACILITIES FAIL TO PROVIDE TEXAS GENCO WITH ADEQUATE
TRANSMISSION CAPACITY, IT MAY NOT BE ABLE TO DELIVER WHOLESALE ELECTRIC POWER
TO ITS CUSTOMERS AND IT MAY INCUR ADDITIONAL COSTS.

Texas Genco depends on transmission and distribution facilities owned and
operated by CenterPoint Houston and by others to deliver the wholesale electric
power it sells from its power generation facilities to its customers, who in
turn deliver power to the end users. If transmission is disrupted, or if
transmission capacity infrastructure is inadequate, Texas Genco's ability to
sell and deliver wholesale electric energy may be adversely impacted.

The single control area of the ERCOT market for 2004 is organized into five
congestion zones. Transmission congestion between the zones could impair Texas
Genco's ability to schedule power for transmission across zonal boundaries,
which are defined by the ERCOT ISO, thereby inhibiting Texas Genco's efforts to
match its facility scheduled outputs with its customer scheduled requirements.
In addition, power generators participating in the ERCOT market could be liable
for congestion costs associated with transferring power between zones.

Texas Genco relies primarily on natural gas, coal, lignite and uranium to
fuel its generation facilities. Texas Genco purchases its fuel from a number of
different suppliers under long-term contracts and on the spot market. Texas
Genco sells firm entitlements to capacity and ancillary services. Therefore, any
disruption in the delivery of fuel could prevent Texas Genco from operating its
facilities, or force Texas Genco to enter into alternative arrangements at
higher than prevailing market prices, to meet its auction commitments, which
could adversely affect its results of operations, financial condition and cash
flows.

TO DATE, TEXAS GENCO HAS SOLD A SUBSTANTIAL PORTION OF ITS CAPACITY
ENTITLEMENTS TO SUBSIDIARIES OF RELIANT RESOURCES. ACCORDINGLY, TEXAS GENCO'S
RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS COULD BE ADVERSELY
AFFECTED IF RELIANT RESOURCES CEASES TO BE A MAJOR CUSTOMER OR FAILS TO MEET
ITS OBLIGATIONS.

By participating in Texas Genco's contractually-mandated auctions,
subsidiaries of Reliant Resources have purchased entitlements to 79% of Texas
Genco's sold 2004 capacity and 68% of Texas Genco's sold 2005 capacity. Reliant
Resources has made these purchases either through the exercise of its
contractual rights to purchase 50% of the entitlements Texas Genco auctioned in
its prior contractually-mandated auctions or through the submission of bids. In
the event Reliant Resources ceases to be a major customer or fails to meet its
obligations to Texas Genco, Texas Genco's results of operations, financial
condition and cash flows could be adversely affected. As of December 31, 2003,
Reliant Resources' securities ratings are below investment grade. Texas Genco
has been granted a security interest in accounts receivable and/or
securitization notes associated with the accounts receivable of certain
subsidiaries of Reliant Resources to secure up to $250 million in purchase
obligations.

TEXAS GENCO MAY INCUR SUBSTANTIAL COSTS AND LIABILITIES AS A RESULT OF ITS

OWNERSHIP OF NUCLEAR FACILITIES.

Texas Genco owns a 30.8% interest in the South Texas Project, a nuclear
powered generation facility. As a result, Texas Genco is subject to risks
associated with the ownership and operation of nuclear facilities. These risks
include:

- liability associated with the potential harmful effects on the
environment and human health resulting from the operation of nuclear
facilities and the storage, handling and disposal of radioactive
materials,

- limitations on the amounts and types of insurance commercially available
to cover losses that might arise in connection with nuclear operations,
and

30

- uncertainties with respect to the technological and financial aspects of
decommissioning nuclear plants at the end of their licensed lives.

The NRC has broad authority under federal law to impose licensing and
safety-related requirements for the operation of nuclear generation facilities.
In the event of non-compliance, the NRC has the authority to impose fines, shut
down a unit, or both, depending upon its assessment of the severity of the
situation, until compliance is achieved. Any revised safety requirements
promulgated by the NRC could necessitate substantial capital expenditures at
nuclear plants. In addition, although we have no reason to anticipate a serious
nuclear incident at the South Texas Project, if an incident were to occur, it
could have a material adverse effect on Texas Genco's results of operations,
financial condition and cash flows.

TEXAS GENCO'S OPERATIONS ARE SUBJECT TO EXTENSIVE REGULATION, INCLUDING
ENVIRONMENTAL REGULATION. IF TEXAS GENCO FAILS TO COMPLY WITH APPLICABLE
REGULATIONS OR TO OBTAIN OR MAINTAIN ANY NECESSARY GOVERNMENTAL PERMIT OR
APPROVAL, IT MAY BE SUBJECT TO CIVIL, ADMINISTRATIVE AND/OR CRIMINAL PENALTIES
THAT COULD ADVERSELY IMPACT ITS RESULTS OF OPERATIONS, FINANCIAL CONDITION AND
CASH FLOWS.

Texas Genco's operations are subject to complex and stringent energy,
environmental and other governmental laws and regulations. The acquisition,
ownership and operation of power generation facilities require numerous permits,
approvals and certificates from federal, state and local governmental agencies.
These facilities are subject to regulation by the Texas Utility Commission
regarding non-rate matters. Existing regulations may be revised or
reinterpreted, new laws and regulations may be adopted or become applicable to
Texas Genco or any of its generation facilities or future changes in laws and
regulations may have a detrimental effect on its business.

Operation of the South Texas Project is subject to regulation by the NRC.
This regulation involves testing, evaluation and modification of all aspects of
plant operation in light of NRC safety and environmental requirements.
Continuous demonstrations to the NRC that plant operations meet applicable
requirements are also required. The NRC has the ultimate authority to determine
whether any nuclear powered generating unit may operate.

Water for certain of Texas Genco's facilities is obtained from public water
authorities. New or revised interpretations of existing agreements by those
authorities or changes in price or availability of water may have a detrimental
effect on Texas Genco's business.

Texas Genco's business is subject to extensive environmental regulation by
federal, state and local authorities. Texas Genco is required to comply with
numerous environmental laws and regulations and to obtain numerous governmental
permits in operating its facilities. Texas Genco may incur significant
additional costs to comply with these requirements. If Texas Genco fails to
comply with these requirements or with any other regulatory requirements that
apply to its operations, it could be subject to administrative, civil and/or
criminal liability and fines, and regulatory agencies could take other actions
seeking to curtail its operations. These liabilities or actions could adversely
impact its results of operations, financial condition and cash flows.

Existing environmental regulations could be revised or reinterpreted, new
laws and regulations could be adopted or become applicable to Texas Genco or its
facilities, and future changes in environmental laws and regulations could
occur, including potential regulatory and enforcement developments related to
air emissions. If any of these events were to occur, Texas Genco's business,
results of operations, financial condition and cash flows could be adversely
affected.

Texas Genco may not be able to obtain or maintain from time to time all
required environmental regulatory approvals. If there is a delay in obtaining
any required environmental regulatory approvals or if Texas Genco fails to
obtain and comply with them, it may not be able to operate its facilities or it
may be required to incur additional costs. Texas Genco is generally responsible
for all on-site liabilities associated with the environmental condition of its
power generation facilities, regardless of when the liabilities arose and
whether the liabilities are known or unknown. These liabilities may be
substantial.

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TEXAS GENCO'S REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.

The demand for power in the ERCOT market is seasonal, with higher demand
occurring during the warmer months. Accordingly, Texas Genco's customers are
generally willing to pay higher prices for entitlements to Texas Genco's
capacity during warmer months. As a result, Texas Genco's revenues and results
of operations are subject to seasonality, with revenues being higher during the
warmer months.

RATE REGULATION OF CERC'S BUSINESS MAY DELAY OR DENY CERC'S FULL RECOVERY OF

ITS COSTS.

CERC's rates for natural gas distribution are regulated by certain
municipalities and state commissions based on an analysis of its invested
capital and its expenses incurred in a test year. Thus, the rates that CERC is
allowed to charge may not match its expenses at any given time. While rate
regulation is, generally, premised on providing a reasonable opportunity to
recover reasonable and necessary operating expenses and to earn a reasonable
return on invested capital, there can be no assurance that the municipalities
and state commissions will judge all of CERC's costs to be reasonable or
necessary or that the regulatory process in which rates are determined will
always result in rates that will produce full recovery of CERC's costs.

CERC'S BUSINESSES MUST COMPETE WITH ALTERNATIVE ENERGY SOURCES, AND ITS
PIPELINES AND GATHERING BUSINESSES MUST COMPETE DIRECTLY WITH OTHERS IN THE
TRANSPORTATION AND STORAGE OF NATURAL GAS.

CERC competes primarily with alternate energy sources such as electricity
and other fuel sources. In some areas, intrastate pipelines, other natural gas
distributors and marketers also compete directly with CERC for natural gas sales
to end-users. In addition, as a result of federal regulatory changes affecting
interstate pipelines, natural gas marketers operating on these pipelines may be
able to bypass CERC's facilities and market, sell and/or transport natural gas
directly to commercial and industrial customers. Any reduction in the amount of
natural gas marketed, sold or transported by CERC as a result of competition may
have an adverse impact on CERC's results of operations, financial condition and
cash flows.

CERC's two interstate pipelines and its gathering systems compete with
other interstate and intrastate pipelines and gathering systems in the
transportation and storage of natural gas. The principal elements of competition
are rates, terms of service, and flexibility and reliability of service. They
also compete indirectly with other forms of energy, including electricity, coal
and fuel oils. The primary competitive factor is price. The actions of CERC's
competitors could lead to lower prices, which may have an adverse impact on
CERC's results of operations, financial condition and cash flows.

CERC'S NATURAL GAS DISTRIBUTION BUSINESS IS SUBJECT TO FLUCTUATIONS IN NATURAL

GAS PRICING LEVELS.

CERC is subject to risk associated with price movements of natural gas.
Movements in natural gas prices might affect CERC's ability to collect balances
due from its customers and could create the potential for uncollectible accounts
expense to exceed the recoverable levels built into CERC's tariff rates. In
addition, a sustained period of high natural gas prices could apply downward
demand pressure on natural gas consumption in CERC's service territory.
Additionally, increasing gas prices could create the need for CERC to provide
collateral in order to purchase gas.

CERC MAY INCUR CARRYING COSTS ASSOCIATED WITH PASSING THROUGH CHANGES IN THE

COSTS OF NATURAL GAS.

Generally, the regulations of the states in which CERC operates allow it to
pass through changes in the costs of natural gas to its customers through
purchased gas adjustment provisions in the applicable tariffs. There is,
however, a timing difference between its purchases of natural gas and the
ultimate recovery of these costs. Consequently, CERC may incur carrying costs as
a result of this timing difference that are not recoverable from its customers.
The failure to recover those additional carrying costs may have an adverse
effect on CERC's results of operations, financial condition and cash flows.

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IF CERC WERE TO FAIL TO EXTEND CONTRACTS WITH TWO OF ITS SIGNIFICANT PIPELINE

CUSTOMERS, THERE COULD BE AN ADVERSE IMPACT ON ITS OPERATIONS.

Contracts with two of our significant pipeline customers, CenterPoint
Energy Arkla and Laclede Gas Company, are currently scheduled to expire in 2005
and 2007, respectively. To the extent the pipelines are unable to extend these
contracts or the contracts are renegotiated at rates substantially different
than the rates provided in the current contracts, there could be an adverse
effect on CERC's results of operations, financial condition and cash flows.

CERC'S INTERSTATE PIPELINES' REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO

FLUCTUATIONS IN THE SUPPLY OF GAS.

CERC's interstate pipelines largely rely on gas sourced in the various
supply basins located in the Midcontinent region of the United States. To the
extent the availability of this supply is substantially reduced, it could have
an adverse effect on CERC's results of operations, financial condition and cash
flows.

CERC'S REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.

A substantial portion of CERC's revenues are derived from natural gas sales
and transportation. Thus, CERC's revenues and results of operations are subject
to seasonality, weather conditions and other changes in natural gas usage, with
revenues being higher during the winter months.

RISK FACTORS ASSOCIATED WITH OUR CONSOLIDATED FINANCIAL CONDITION

IF WE ARE UNABLE TO ARRANGE FUTURE FINANCINGS ON ACCEPTABLE TERMS, OUR ABILITY
TO FUND FUTURE CAPITAL EXPENDITURES AND REFINANCE EXISTING INDEBTEDNESS COULD
BE LIMITED.

As of December 31, 2003, we had $11.0 billion of outstanding indebtedness
on a consolidated basis. Approximately $3.5 billion principal amount of this
debt must be paid through 2006, excluding principal repayments of approximately
$142 million on transition bonds. In addition, the capital constraints and other
factors currently impacting our businesses may require our future indebtedness
to include terms that are more restrictive or burdensome than those of our
current indebtedness. These terms may negatively impact our ability to operate
our business, adversely affect our financial condition and results of operations
or severely restrict or prohibit distributions from our subsidiaries. The
success of our future financing efforts may depend, at least in part, on:

- our ability to recover the true-up components and to monetize our
investment in Texas Genco;

Our capital structure and liquidity will be significantly impacted in the
2004/2005 period by our ability to recover the true-up components through the
regulatory process beginning in March 2004. To the extent our recovery is denied
or materially reduced, our liquidity and financial condition will be materially
adversely affected.

33

As of March 1, 2004, our CenterPoint Houston subsidiary has $3.2 billion
principal amount of general mortgage bonds outstanding and $382 million of first
mortgage bonds outstanding. It may issue additional general mortgage bonds on
the basis of retired bonds, 70% of property additions or cash deposited with the
trustee. Although approximately $400 million of additional first mortgage bonds
and general mortgage bonds could be issued on the basis of retired bonds and 70%
of property additions as of December 31, 2003, CenterPoint Houston has agreed
under the $1.3 billion collateralized term loan maturing in 2005 to not issue,
subject to certain exceptions, more than $200 million of incremental secured or
unsecured debt. In addition, CenterPoint Houston is contractually prohibited,
subject to certain exceptions, from issuing additional first mortgage bonds.

Our current credit ratings are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Future Sources and Uses of Cash -- Impact on Liquidity of a
Downgrade in Credit Ratings" in Item 7 of Part II of this report. We cannot
assure you that these credit ratings will remain in effect for any given period
of time or that one or more of these ratings will not be lowered or withdrawn
entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities. Each rating should be
evaluated independently of any other rating. Any future reduction or withdrawal
of one or more of our credit ratings could have a material adverse impact on our
ability to access capital on acceptable terms.

AS A HOLDING COMPANY WITH NO OPERATIONS OF OUR OWN, WE WILL DEPEND ON
DISTRIBUTIONS FROM OUR SUBSIDIARIES TO MEET OUR PAYMENT OBLIGATIONS, AND
PROVISIONS OF APPLICABLE LAW OR CONTRACTUAL RESTRICTIONS COULD LIMIT THE
AMOUNT OF THOSE DISTRIBUTIONS.

We derive substantially all our operating income from, and hold
substantially all our assets through, our subsidiaries. As a result, we will
depend on distributions from our subsidiaries in order to meet our payment
obligations. In general, these subsidiaries are separate and distinct legal
entities and have no obligation to provide us with funds for our payment
obligations, whether by dividends, distributions, loans or otherwise. In
addition, provisions of applicable law, such as those limiting the legal sources
of dividends and those under the 1935 Act, limit their ability to make payments
or other distributions to us, and they could agree to contractual restrictions
on their ability to make distributions.

Our right to receive any assets of any subsidiary, and therefore the right
of our creditors to participate in those assets, will be effectively
subordinated to the claims of that subsidiary's creditors, including trade
creditors. In addition, even if we were a creditor of any subsidiary, our rights
as a creditor would be subordinated to any security interest in the assets of
that subsidiary and any indebtedness of the subsidiary senior to that held by
us.

As of December 31, 2003, we had $2.8 billion of outstanding floating-rate
debt owed to third parties. The interest rate spreads on such debt are
substantially above our historical interest rate spreads. In addition, any
floating-rate debt issued by us in the future could be at interest rates
substantially above our historical borrowing rates. While we may seek to use
interest rate swaps in order to hedge portions of our floating-rate debt, we may
not be successful in obtaining hedges on acceptable terms. An increase in
short-term interest rates could result in higher interest costs and could
adversely affect our results of operations, financial condition and cash flows.

34

OTHER RISKS

WE AND CENTERPOINT HOUSTON COULD INCUR LIABILITIES ASSOCIATED WITH BUSINESSES

AND ASSETS THAT WE HAVE TRANSFERRED TO OTHERS.

Under some circumstances, we and CenterPoint Houston could incur
liabilities associated with assets and businesses we and CenterPoint Houston no
longer own. These assets and businesses were previously owned by Reliant Energy
directly or through subsidiaries and include:

- those transferred to Reliant Resources or its subsidiaries in connection
with the organization and capitalization of Reliant Resources prior to
its initial public offering in 2001,

- those transferred to Texas Genco in connection with its organization and
capitalization, and

- those transferred to us and CenterPoint Houston in connection with the
August 2002 restructuring of Reliant Energy.

In connection with the organization and capitalization of Reliant
Resources, Reliant Resources and its subsidiaries assumed liabilities associated
with various assets and businesses Reliant Energy transferred to them. Reliant
Resources also agreed to indemnify, and cause the applicable transferee
subsidiaries to indemnify, us and our subsidiaries, including CenterPoint
Houston, with respect to liabilities associated with the transferred assets and
businesses. The indemnity provisions were intended to place sole financial
responsibility on Reliant Resources and its subsidiaries for all liabilities
associated with the current and historical businesses and operations of Reliant
Resources, regardless of the time those liabilities arose. If Reliant Resources
is unable to satisfy a liability that has been so assumed in circumstances in
which Reliant Energy has not been released from the liability in connection with
the transfer, we or CenterPoint Houston could be responsible for satisfying the
liability.

Reliant Resources reported in its Annual Report on Form 10-K for the year
ended December 31, 2003 that as of December 31, 2003 it had $6.1 billion of
total debt and its unsecured debt ratings are currently below investment grade.
If Reliant Resources were unable to meet its obligations, it would need to
consider, among various options, restructuring under the bankruptcy laws, in
which event Reliant Resources might not honor its indemnification obligations
and claims by Reliant Resources' creditors might be made against us as its
former owner.

Reliant Energy and Reliant Resources are named as defendants in a number of
lawsuits arising out of power sales in California and other West Coast markets
and financial reporting matters. Although these matters relate to the business
and operations of Reliant Resources, claims against Reliant Energy have been
made on grounds that include the effect of Reliant Resources' financial results
on Reliant Energy's historical financial statements and liability of Reliant
Energy as a controlling shareholder of Reliant Resources. We or CenterPoint
Houston could incur liability if claims in one or more of these lawsuits were
successfully asserted against us or CenterPoint Houston and indemnification from
Reliant Resources were determined to be unavailable or if Reliant Resources were
unable to satisfy indemnification obligations owed with respect to those claims.

In connection with the organization and capitalization of Texas Genco,
Texas Genco assumed liabilities associated with the electric generation assets
Reliant Energy transferred to it. Texas Genco also agreed to indemnify, and
cause the applicable transferee subsidiaries to indemnify, us and our
subsidiaries, including CenterPoint Houston, with respect to liabilities
associated with the transferred assets and businesses. In many cases the
liabilities assumed were held by CenterPoint Houston and CenterPoint Houston was
not released by third parties from these liabilities. The indemnity provisions
were intended generally to place sole financial responsibility on Texas Genco
and its subsidiaries for all liabilities associated with the current and
historical businesses and operations of Texas Genco, regardless of the time
those liabilities arose. If Texas Genco were unable to satisfy a liability that
had been so assumed or indemnified against, and provided Reliant Energy had not
been released from the liability in connection with the transfer, CenterPoint
Houston could be responsible for satisfying the liability.

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WE MAY NOT BE ABLE TO MONETIZE TEXAS GENCO ON TERMS WE FIND ACCEPTABLE.

On January 23, 2004, Reliant Resources announced that it would not exercise
its option to purchase the common stock of Texas Genco that we own. We will
continue to operate Texas Genco's facilities and are pursuing an alternative
strategy to monetize Texas Genco, and we have engaged a financial advisor to
assist us in that pursuit. We may not be able to monetize our interest in Texas
Genco under any alternative strategy on terms we find acceptable. In addition,
delays in monetization may increase the risk that the value of the ownership
interest used in the stranded cost determination, which is to be based on market
prices for Texas Genco common stock during the 120 trading days ending on March
30, 2004, will be higher than the proceeds received in the monetization process.

WE, TOGETHER WITH OUR SUBSIDIARIES, EXCLUDING TEXAS GENCO, ARE SUBJECT TO
REGULATION UNDER THE 1935 ACT. THE 1935 ACT AND RELATED RULES AND REGULATIONS
IMPOSE A NUMBER OF RESTRICTIONS ON OUR ACTIVITIES.

We and our subsidiaries, excluding Texas Genco, are subject to regulation
by the SEC under the 1935 Act. The 1935 Act, among other things, limits the
ability of a holding company and its regulated subsidiaries to issue debt and
equity securities without prior authorization, restricts the source of dividend
payments to current and retained earnings without prior authorization, regulates
sales and acquisitions of certain assets and businesses and governs affiliate
transactions.

We received an order from the SEC under the 1935 Act on June 30, 2003
relating to our financing activities, which is effective until June 30, 2005. We
must seek a new order before the expiration date. Although authorized levels of
financing, together with current levels of liquidity, are believed to be
adequate during the period the order is effective, unforeseen events could
result in capital needs in excess of authorized amounts, necessitating further
authorization from the SEC. Approval of filings under the 1935 Act can take
extended periods.

If as a result of the 2004 True-Up Proceeding or any other event we are
required to take a charge against our net income, our current earnings could be
reduced below the level which would enable us to pay the quarterly dividend on
our common stock under our current SEC financing order. We expect to file an
application with the SEC under the 1935 Act requesting an order authorizing us,
in the event that we are required to take such a charge against our net income,
to pay quarterly dividends out of capital or unearned surplus.

In addition, we would be required under the 1935 Act to obtain approval
from the SEC to issue and sell securities for purposes of funding Texas Genco's
operations or to guarantee a security of Texas Genco, except in emergency
situations (in which we could provide funding pursuant to applicable SEC rules).
Our failure to obtain approvals under the 1935 Act in a timely manner could
adversely affect our and our subsidiaries' results of operations, financial
condition and cash flows.

The United States Congress is currently considering legislation that has a
provision that would repeal the 1935 Act. We cannot predict at this time whether
this legislation or any variation thereof will be adopted or, if adopted, the
effect of any such law on our business.

We currently have general liability and property insurance in place to
cover certain of our facilities in amounts that we consider appropriate. Such
policies are subject to certain limits and deductibles and do not include
business interruption coverage. We cannot assure you that insurance coverage
will be available in the future at current costs or on commercially reasonable
terms or that the insurance proceeds received for any loss of or any damage to
any of our facilities will be sufficient to restore the loss or damage without
negative impact on our results of operations, financial condition and cash
flows.

Texas Genco and the other owners of the South Texas Project maintain
nuclear property and nuclear liability insurance coverage as required by law and
periodically review available limits and coverage for additional protection. The
owners of the South Texas Project currently maintain $2.75 billion in property

36

damage insurance coverage, which is above the legally required minimum, but is
less than the total amount of insurance currently available for such losses.
Under the federal Price Anderson Act, the maximum liability to the public of
owners of nuclear power plants was $10.6 billion as of December 31, 2003. Owners
are required under the Price Anderson Act to insure their liability for nuclear
incidents and protective evacuations. Texas Genco and the other owners of the
South Texas Project currently maintain the required nuclear liability insurance
and participate in the industry retrospective rating plan. In addition, the
security procedures at this facility have recently been enhanced to provide
additional protection against terrorist attacks. All potential losses or
liabilities associated with the South Texas Project may not be insurable, and
the amount of insurance may not be sufficient to cover them.

In common with other companies in its line of business that serve coastal
regions, CenterPoint Houston does not have insurance covering its transmission
and distribution system because CenterPoint Houston believes it to be cost
prohibitive. If CenterPoint Houston were to sustain any loss of or damage to its
transmission and distribution properties, it would be entitled to seek to
recover such loss or damage through a change in its regulated rates, although
there is no assurance that CenterPoint Houston ultimately would obtain any such
rate recovery or that any such rate recovery would be timely granted. Therefore,
we cannot assure you that CenterPoint Houston will be able to restore any loss
of or damage to any of its transmission and distribution properties without
negative impact on its results of operations, financial condition and cash
flows.

ITEM 2. PROPERTIES

CHARACTER OF OWNERSHIP

We own or lease our principal properties in fee, including our corporate
office space and various real property and facilities relating to our generation
assets and development activities. Most of our electric lines and gas mains are
located, pursuant to easements and other rights, on public roads or on land
owned by others.

ELECTRIC TRANSMISSION & DISTRIBUTION

For information regarding the properties of our Electric Transmission &
Distribution business segment, please read "Our Business -- Electric
Transmission & Distribution" in Item 1 of this report, which information is
incorporated herein by reference.

ELECTRIC GENERATION

For information regarding the properties of our Electric Generation
business segment, please read "Our Business -- Electric Generation" in Item 1 of
this report, which information is incorporated herein by reference.

NATURAL GAS DISTRIBUTION

For information regarding the properties of our Natural Gas Distribution
business segment, please read "Our Business -- Natural Gas Distribution" in Item
1 of this report, which information is incorporated herein by reference.

PIPELINES AND GATHERING

For information regarding the properties of our Pipelines and Gathering
business segment, please read "Our Business -- Pipelines and Gathering" in Item
1 of this report, which information is incorporated herein by reference.

OTHER OPERATIONS

For information regarding the properties of our Other Operations business
segment, please read "Our Business -- Other Operations" in Item 1 of this
report, which information is incorporated herein by reference.

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ITEM 3. LEGAL PROCEEDINGS

For a brief description of certain legal and regulatory proceedings
affecting us, please read "Regulation" and "Environmental Matters" in Item 1 of
this report and Notes 4 and 12 to our consolidated financial statements, which
information is incorporated herein by reference.

In addition to the matters incorporated herein by reference, the following
matters that we previously reported have been resolved:

In August and October 2003, class action lawsuits were filed against
CenterPoint Houston and Reliant Energy Services in federal court in New York on
behalf of purchasers of natural gas futures contracts on the New York Mercantile
Exchange. A third, similar class action was filed in the same court in November
2003. The complaints alleged that the defendants manipulated the price of
natural gas through their gas trading activities and price reporting practices
in violation of the Commodity Exchange Act during the period January 1, 2000
through December 31, 2002. The plaintiffs sought damages based on the effect of
such alleged manipulation on the value of the gas futures contracts they bought
or sold. In January 2004, the plaintiffs voluntarily dismissed CenterPoint
Houston from these lawsuits.

During 2003, we and Texas Genco were engaged in a dispute with Northwestern
Resources Co. (NWR), the supplier of fuel to the Limestone electric generation
facility, over the terms and pricing at which NWR supplies fuel to that facility
under a 1999 settlement agreement between the parties and under ancillary
obligations. Both sides to the dispute initiated lawsuits, but in January 2004,
NWR and Texas Genco reached a settlement under which they agreed to dismiss
those lawsuits and under which NWR would continue to provide certain quantities
of lignite at specified prices during the period from 2004 through 2007, after
which time the pricing would revert to pricing provided for under the 1999
settlement.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to the vote of our security holders during
the fourth quarter of 2003.

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PART II

ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

As of February 29, 2004, our common stock was held of record by
approximately 62,981 shareholders. Our common stock is listed on the New York
and Chicago Stock Exchanges and is traded under the symbol "CNP."

The following table sets forth the high and low closing prices of the
common stock of CenterPoint Energy or its predecessor on the New York Stock
Exchange composite tape during the periods indicated, as reported by
Bloomberg,and the cash dividends declared in these periods. Prior to August 31,
2002, information shown is for our predecessor, Reliant Energy. Cash dividends
paid aggregated $1.07 per share in 2002 and $0.40 per share in 2003.

(1) The reduction in the quarterly dividend to $0.16 reflects the reduced size
of CenterPoint Energy after its distribution of all the shares of common
stock of Reliant Resources it owned.

(2) The fourth quarter 2002 stock prices reflect the distribution of our 83%
ownership interest in Reliant Resources on September 30, 2002. The closing
price of Reliant Resources' common stock on that date was $1.75 per share.

39

(3) The $0.20 per share dividend for the second quarter of 2003 included the
third quarter dividend declared on June 18, 2003 and paid on September 10,
2003.

The closing market price of our common stock on December 31, 2003 was $9.69
per share.

Under the terms of our $2.3 billion bank facility, we agreed that our
quarterly common stock dividend will not exceed $0.10 per share. The 1935 Act
restricts the source of our dividend payments to current and retained earnings,
in the absence of approval from the SEC under the 1935 Act to pay dividends out
of capital or unearned surplus.

In addition to the limitations imposed by our bank facility and the 1935
Act, the amount of future cash dividends will be subject to determination based
upon our results of operations and financial condition, our future business
prospects, any applicable contractual restrictions and other factors that our
board of directors considers relevant and will be declared at the discretion of
the board of directors.

Recent Sale of Unregistered Securities

The information set forth in Note 9(b) of the Notes to our Consolidated
Financial Statements and in Management's Discussion and Analysis of Financial
Condition and Results of Operations of CenterPoint Energy and Subsidiaries in
Item 7 of Part II of this report regarding the issuance on December 17, 2003 of
$255 million aggregate principal amount of our 2.875% convertible senior notes
due 2024 is incorporated by reference herein. We relied on the private placement
exemption under Section 4(2) of the Securities Act of 1933 for the sale to the
initial purchasers.

In addition, we have been advised by Citigroup Global Markets Inc. and
Deutsche Bank Securities Inc., the representatives of the initial purchasers of
the notes, that the notes were issued only to "qualified institutional buyers"
in reliance on Rule 144A under the Securities Act of 1933 and outside the United
States in accordance with Regulation S under the Securities Act of 1933. The
notes were issued at 100% of the principal amount thereof. The initial
purchasers purchased the notes from us at 97.75% of the principal amount
thereof, plus accrued interest.

The notes are convertible into shares of our common stock at a conversion
rate of 78.064 shares per $1,000 principal amount of notes (which is equal to a
conversion price of $12.81 per share), subject to adjustment, but only in
certain specified circumstances. The notes also have a contingent interest
feature requiring contingent interest to be paid to holders of the notes in
certain specified circumstances.

In October 2003, we awarded Milton Carroll 10,000 shares of our common
stock pursuant to an agreement under which he serves as Chairman of our Board of
Directors. We relied on the private placement exemption under Section 4(2) of
the Securities Act of 1933.

Repurchases of Equity Securities

During the year ended December 31, 2003, none of our equity securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934 was
purchased by or on behalf of us or any of our "affiliated purchasers," as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.

40

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data with respect to our
consolidated financial condition and consolidated results of operations and
should be read in conjunction with our consolidated financial statements and the
related notes in Item 8 of this report.

share and $4.08 earnings per diluted share. For additional information on
the indexed debt securities and Time Warner investment, please read Note 7
to our consolidated financial statements. The extraordinary item in 1999 is
a loss related to an accounting impairment of certain generation-related
regulatory assets of our Electric Generation business segment.

(2) 2001 net income includes the cumulative effect of an accounting change
resulting from the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ($59 million after-tax gain, or $0.20
earnings per basic and diluted share). For additional information related to
the cumulative effect of accounting change, please read Note 5 to our
consolidated financial statements.

(3) 2003 net income includes the cumulative effect of an accounting change
resulting from the adoption of SFAS No. 143, "Accounting for Asset
Retirement Obligations" ($80 million after-tax gain, or $0.26 earnings per
basic and diluted share). For additional information related to the
cumulative effect of accounting change, please read Note 2(n) to our
consolidated financial statements.

(4) Resolution of the 2004 True-Up Proceeding and monetization of our remaining
interest in Texas Genco could materially impact our results of operations,
financial condition and cash flows. Additionally, we are no longer permitted
under the Texas electric restructuring law to record non-cash ECOM revenue
in 2004. For more information on these and other matters currently affecting
us, please see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Executive Summary -- Significant Events in
2004."

(5) The subsidiary trusts that issued trust preferred securities have been
deconsolidated as a result of the adoption of FIN 46 "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research
Bulletin No. 51" (FIN 46) and the subordinated debentures issued to those
trusts are now reported as long-term debt as of December 31, 2003. For
additional information related to the adoption of FIN 46, please read Note
2(n) to our consolidated financial statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in combination with
our consolidated financial statements included in Item 8 herein.

OVERVIEW

BACKGROUND

We are a public utility holding company, created on August 31, 2002 as part
of a corporate restructuring of Reliant Energy, Incorporated (Reliant Energy) in
compliance with requirements of the Texas electric restructuring law. We are the
successor to Reliant Energy for financial reporting purposes under the
Securities Exchange Act of 1934. Our operating subsidiaries own and operate
electric generation plants, electric transmission and distribution facilities,
natural gas distribution facilities and natural gas pipelines. We are a
registered holding company under the Public Utility Holding Company Act of 1935,
as amended (1935 Act). For information about the 1935 Act, please read " --
Liquidity and Capital Resources -- Future Sources and Uses of Cash -- Certain
Contractual and Regulatory Limits on Ability to Issue Securities and Pay
Dividends on Our Common Stock." Our indirect wholly owned subsidiaries include:

We also have an approximately 81% ownership interest in Texas Genco
Holdings, Inc. (Texas Genco), which owns and operates the Texas generating
plants formerly belonging to the integrated electric utility that was a part of
Reliant Energy. We distributed the remaining 19% of the outstanding common stock
of Texas Genco to our shareholders in January 2003.

42

At the time of Reliant Energy's corporate restructuring, it owned an 83%
interest in Reliant Resources, Inc. (Reliant Resources). On September 30, 2002,
we distributed that interest to our shareholders (the Reliant Resources
Distribution).

BUSINESS SEGMENTS

In this section, we discuss our results from continuing operations on a
consolidated basis and individually for each of our business segments. We also
discuss our liquidity, capital resources and critical accounting policies.
CenterPoint Energy is first and foremost an energy delivery company and it is
our intention to remain focused on this segment of the energy business. The
results of our business operations are significantly impacted by weather,
customer growth, cost management and rate proceedings before regulatory
agencies. Effective with the full deregulation of sales of electric energy to
retail customers in Texas beginning in January 2002, power generators and retail
electric providers in Texas ceased to be subject to traditional cost-based
regulation. Since that date, we have sold generation capacity, energy and
ancillary services related to power generation at prices determined by the
market. The Texas generation operations are reported in the Electric Generation
business segment. Our transmission and distribution services remain subject to
rate regulation and are reported in the Electric Transmission & Distribution
business segment as are impacts of generation-related stranded costs recoverable
by the regulated utility. Although our former retail sales business is no longer
conducted by us, retail customers remained regulated customers of our former
integrated electric utility, Reliant Energy HL&P, through the date of their
first meter reading in 2002. Sales of electricity to retail customers in 2002
prior to this meter reading are reflected in the Electric Transmission &
Distribution business segment. Our reportable business segments include:

Electric Transmission and Distribution

Our electric transmission and distribution operations provide electric
transmission and distribution services to approximately 1.8 million metered
customers in a 5,000-square-mile area of the Texas Gulf coast that has a
population of approximately 4.7 million people and includes Houston.

CenterPoint Houston transports electricity from power plants to substations
and from one substation to another and to retail electric customers in locations
throughout the control area managed by the Electric Reliability Council of
Texas, Inc. (ERCOT) on behalf of retail electric providers. ERCOT is an
intrastate network which serves as the regional reliability coordinating council
for member electric power systems in Texas. The ERCOT market represents
approximately 85% of the demand for power in Texas and is one of the nation's
largest power markets. Transmission services are provided under tariffs approved
by the Public Utility Commission of Texas (the Texas Utility Commission).

Operations include construction and maintenance of electric transmission
and distribution facilities, metering services, outage response services and
other call center operations. Distribution services are provided under tariffs
approved by the Texas Utility Commission.

Electric Generation

Texas Genco owns and operates 60 generating units at 11 power generation
facilities. Texas Genco also owns a 30.8% interest in the South Texas Project
Electric Generating Station (South Texas Project), a nuclear generating station
with two 1,250 megawatt (MW) nuclear generating units. As of December 31, 2003,
the aggregate net generating capacity of Texas Genco's portfolio of generating
assets was 14,153 MW, of which 2,988 MW of gas-fired capacity are currently
mothballed. Texas Genco sells electric generation capacity, energy and ancillary
services in the ERCOT market. Collectively, Texas Genco's facilities provide
over 18% of the aggregate net generating capacity serving the ERCOT market.

regulated as natural gas utility operations. Its operations also include
non-rate regulated retail gas sales to and transportation services for
commercial and industrial customers in the six states listed above as well as
several other Midwestern states.

- a $355 million increase in operating income at Texas Genco due to higher
capacity auction prices;

- continued customer growth with the addition of nearly 85,000 metered
electric and gas customers since December 2002, or an annualized 2%
growth;

- an increase of $33 million in revenues in the natural gas distribution
operations from rate increases;

- an increase of $170 million in interest expense;

- an increase of $69 million in operation and maintenance expense related
to CenterPoint Houston's final fuel reconciliation;

- an increase of $58 million in pension, employee benefit and insurance
costs; and

- a reduction of $198 million in capital expenditures.

Net income for 2003 includes an $80 million after-tax non-cash gain ($0.26
per diluted share) from the adoption of SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143) as further discussed below under
"-- Consolidated Results of Operations". Excluded from the $80 million after-tax
cumulative effect of accounting change recorded during the three months ended
March 31, 2003, is minority interest of $19 million related to the Texas Genco
stock not owned by CenterPoint Energy.

In 2003, we accessed the capital markets to raise approximately $4 billion.
We used these proceeds to repay maturing debt, refinance higher coupon debt, pay
down our short-term credit facilities and enhance our liquidity.

CenterPoint Energy distributed approximately 19% of the 80 million
outstanding shares of common stock of Texas Genco to its shareholders on January
6, 2003 (Texas Genco Distribution). As a result of the Texas Genco Distribution,
CenterPoint Energy recorded an impairment charge of $399 million, which is
reflected as a regulatory asset representing stranded costs on our consolidated
balance sheet as of December 31, 2003. This impairment charge represents the
excess of the carrying value of CenterPoint Energy's net investment in Texas
Genco over the market value of the Texas Genco common stock that was
distributed. The financial impact of this impairment was offset by recording a
$399 million regulatory asset reflecting CenterPoint Energy's expectation of
stranded cost recovery of such impairment. Since this amount is expected to be
recovered in the 2004 True-Up Proceeding, CenterPoint Houston has recorded a
regulatory asset, reflecting its

44

right to recover this amount, and an associated payable to us. Any additional
impairment or loss that CenterPoint Energy incurs on its Texas Genco investment
that CenterPoint Houston expects to recover as stranded investment will be
recorded in the same manner.

SIGNIFICANT EVENTS IN 2004

During 2004, we expect to complete additional steps in a process that began
when Texas adopted legislation designed to deregulate and restructure the
electric utility industry in the state. That legislation (Texas electric
restructuring law) required integrated electric utilities to separate their
generating, transmission and distribution and retail sales functions pursuant to
plans approved by the Texas Utility Commission.

The Texas electric restructuring law contains provisions that allow our
transmission and distribution utility, CenterPoint Houston, to recover the
amount by which the market value of our generating assets, as determined by the
Texas Utility Commission under a formula prescribed in the law, is below the
regulatory net book value for those assets as of the end of 2001. It also allows
CenterPoint Houston to recover certain other transition costs, such as a final
fuel reconciliation balance, regulatory assets and the difference between the
Texas Utility Commission's projected market prices for generation during 2002
and 2003 and actual market prices for generation as determined in the
state-mandated capacity auctions during that period (called the ECOM true-up).
Those amounts, and certain other adjustments, are to be determined by the Texas
Utility Commission in a proceeding that will begin on March 31, 2004 (2004
True-Up Proceeding). The law requires a final order to be issued by the Texas
Utility Commission not more than 150 days after a proper filing is made by the
regulated utility, although, under its rules the Texas Utility Commission can
extend the 150 day deadline for good cause. After the Texas Utility Commission
determines the amount of the true-up components (the true-up balance) that the
utility may recover, the utility will recover those amounts through a transition
charge added to its transmission and distribution rates. Assuming receipt of a
timely final order from the Texas Utility Commission, we expect to begin earning
a non-cash rate of return on the true-up balance in the third quarter of 2004.
We intend to seek authority from the Texas Utility Commission to securitize all
or a portion of the true-up balance as early as the fourth quarter of 2004
through the issuance of transition bonds and to be in a position to issue those
bonds by early 2005. Transition bonds would be issued through a special purpose
entity that would be a subsidiary of CenterPoint Houston, but they would be non-
recourse to CenterPoint Houston. Any portion of the true-up balance not
securitized by transition bonds will be recovered through a non-bypassable
competition transition charge. CenterPoint Houston will distribute recovery of
the true-up components not used to repay indebtedness to us through either the
payment of dividends or the settlement of intercompany payables. We can then
move funds back to CenterPoint Houston, either through equity or intercompany
debt, in order to maintain CenterPoint Houston's capital structure at the
appropriate levels.

As discussed above, in accordance with the Texas electric restructuring
law, we expect to seek recovery of substantial amounts for the true-up
components. Determination of the amounts actually recovered will be made by the
Texas Utility Commission in a proceeding in which we expect that various parties
will challenge our claims, potentially resulting in an award of less than the
full amount to which we believe CenterPoint Houston is entitled. An ultimate
determination or a settlement at an amount less than that recorded in our
financial statements could lead to a charge that would materially adversely
affect our results of operations, financial condition and cash flows.

For some time, we have expected to monetize our remaining 81% interest in
Texas Genco in 2004. In January 2004, Reliant Resources did not exercise its
option to purchase our 81% interest in Texas Genco. We have engaged a financial
advisor to assist us in exploring the sale of our 81% interest in Texas Genco.
Any proceeds from the monetization of Texas Genco are expected to be used to
repay indebtedness.

The alternatives for monetization of our remaining interest in Texas Genco
may not be completed in 2004 and may result in receipt of proceeds in an amount
different from the market valuation placed on Texas Genco in the 2004 True-Up
Proceeding. To the extent that the Texas Utility Commission uses a market value
higher than the amount ultimately realized from the sale of Texas Genco, a loss
would be recognized. The

45

completion of the 2004 True-Up Proceeding and recovery of stranded costs is not
dependent on the sale of Texas Genco.

Resolution of the 2004 True-Up Proceeding and the monetization of our
remaining interest in Texas Genco are the two most significant events facing the
company in 2004. These events are expected to result in aggregate proceeds of
over $5 billion based on the Texas Utility Commission rules. We have committed
to use these proceeds to repay our indebtedness. Either or both events could,
however, lead to charges against earnings. If those charges occur early in the
year or are of sufficient magnitude, they could reduce our earnings below the
level required for us to continue paying our current quarterly dividends out of
current earnings as required under our Securities and Exchange Commission (SEC)
financing order. We expect to file an application with the SEC under the 1935
Act requesting an order authorizing us, in the event we are required to take
such a charge against earnings, to pay quarterly dividends out of capital or
unearned surplus.

The Texas Utility Commission issued a final order in October 2001 (October
2001 Order) that established the transmission and distribution utility rates
that became effective in January 2002. In this Order, the Texas Utility
Commission found that CenterPoint Houston had over-mitigated its stranded costs
by redirecting transmission and distribution depreciation and by accelerating
depreciation of generation assets as provided under the transition plan and
Texas electric restructuring law. As a result of the October 2001 Order,
CenterPoint Houston was required to refund $1.1 billion through excess
mitigation credits to certain retail electric customers during a seven-year
period which began in January 2002, and which amount to approximately $238
million per year. Amounts refunded will be considered in the 2004 True-Up
Proceeding, and we expect that such refunds will be discontinued as a result of
the 2004 True-Up Proceeding.

In connection with the implementation of the Texas electric restructuring
law, the Texas Utility Commission has set a "price to beat" that retail electric
providers affiliated or formerly affiliated with a former integrated utility
must charge residential and small commercial customers within their affiliated
electric utility's service area. The 2004 True-Up Proceeding provides for a
clawback of the "price to beat" in excess of the market price of electricity if
40% of the "price to beat" load is not served by a non-affiliated retail
electric provider by January 1, 2004. Pursuant to the Texas electric
restructuring law and the master separation agreement entered into in connection
with the September 30, 2002 spin-off of our interest in Reliant Resources to our
shareholders, Reliant Resources is obligated to pay CenterPoint Houston for the
clawback component of the 2004 True-Up Proceeding. Based on an order issued on
February 13, 2004 by the Texas Utility Commission, the clawback will equal $150
times the number of residential customers served by Reliant Resources in
CenterPoint Houston's service territory, less the number of residential
customers served by Reliant Resources outside CenterPoint Houston's service
territory, on January 1, 2004. As reported in Reliant Resources' Annual Report
on Form 10-K for the year ended December 31, 2003, Reliant Resources expects
that the clawback payment will be $175 million. We expect that before, or upon,
issuance of a final order in the 2004 True-Up Proceeding we will receive the
clawback payment from Reliant Resources, which will reduce the amount of
recoverable costs to be determined in the 2004 True-Up Proceeding.

The 2004 True-Up Proceeding will include the balance from the final fuel
reconciliation proceeding for the fuel component of electric rates. Prior to the
beginning of competition, fuel costs were a component of electric rates and
those costs were reviewed and reconciled periodically by the Texas Utility
Commission. Although the final fuel reconciliation is a separate proceeding that
is currently underway, the final fuel over- or under- recovery balance will be
included in the 2004 True-Up Proceeding, either as a reduction to or increase in
the amount to be recovered.

Following adoption of the true-up rule by the Texas Utility Commission in
2001, CenterPoint Houston appealed the provisions of the rule that permitted
interest to be recovered on stranded costs only from the date of the Texas
Utility Commission's final order in the 2004 True-Up Proceeding, instead of from
January 1, 2002 as CenterPoint Houston contends is required by law. On January
30, 2004, the Texas Supreme Court granted our petition for review of the true-up
rule. Oral arguments were heard on February 18, 2004. The decision by the Court
is pending. We have not accrued interest income on stranded costs in our
consolidated financial statements, but estimate such interest income would be
material to our consolidated financial statements.

46

We recorded non-cash ECOM revenue of $697 million in 2002 and $661 million
in 2003. We are no longer permitted under the Texas electric restructuring law
to record non-cash ECOM revenue in 2004. The reduction in interest costs that
should result from the use of proceeds of securitization and monetization to
reduce debt, to the extent received in 2004, should help offset the resulting
reductions in earnings, but both the amount and timing of these securitization
and monetization efforts is a function of the regulatory process described
above.

PROCESS IMPROVEMENT INITIATIVE

In late 2002, we launched a company-wide process improvement effort
designed to examine key aspects of how we conduct our business, and identify,
design and implement improvements to enhance service quality, improve customer
satisfaction and reduce costs. In 2003, we identified our core business
processes and established process teams. Progress was made in understanding
existing processes and identifying opportunities for improvement. Over the next
several years, we plan to design and implement processes that will improve
productivity and efficiency, reduce our cost structure and enhance service to
our customers.

CERTAIN FACTORS AFFECTING FUTURE EARNINGS

Our past earnings and results of operations are not necessarily indicative
of our future earnings and results of operations. The magnitude of our future
earnings and results of our operations will depend on or be affected by numerous
factors including:

- the timing and outcome of the regulatory process leading to the
determination and recovery of the true-up components and the
securitization of these amounts;

- the timing and results of the monetization of our interest in Texas
Genco;

- state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation and restructuring of the electric
utility industry, constraints placed on our activities or business by the
1935 Act, changes in or application of laws or regulations applicable to
other aspects of our business and actions with respect to:

- allowed rates of return;

- rate structures;

- recovery of investments; and

- operation and construction of facilities;

- termination of accruals of ECOM true-up after 2003;

- industrial, commercial and residential growth in our service territory
and changes in market demand and demographic patterns;

- the timing and extent of changes in commodity prices, particularly
natural gas;

- changes in interest rates or rates of inflation;

- weather variations and other natural phenomena;

- the timing and extent of changes in the supply of natural gas;

- commercial bank and financial market conditions, our access to capital,
the cost of such capital, receipt of certain approvals under the 1935
Act, and the results of our financing and refinancing efforts, including
availability of funds in the debt capital markets;

- actions by rating agencies;

- inability of various counterparties to meet their obligations to us;

- non-payment for our services due to financial distress of our customers,
including Reliant Resources;

47

- the outcome of the pending securities lawsuits against us, Reliant Energy
and Reliant Resources;

- the ability of Reliant Resources to satisfy its obligations to us,
including indemnity obligations and obligations to pay the "price to
beat" clawback; and

- other factors discussed in Item 1 of this report under "Risk Factors."

CONSOLIDATED RESULTS OF OPERATIONS

All dollar amounts in the tables that follow are in millions, except for
per share amounts.

Income from Continuing Operations. We reported income from continuing
operations before cumulative effect of accounting change of $420 million ($1.37
per diluted share) for 2003 compared to $369 million ($1.23 per diluted share)
for 2002. The increase in income from continuing operations before the
cumulative

48

effect of accounting change for 2003 compared to 2002 of $51 million was
primarily due to a $355 million increase in operating income from our Electric
Generation business segment primarily resulting from increased margins from
higher capacity and energy revenues as a result of higher capacity auction
prices driven by higher natural gas prices, partially offset by a $170 million
increase in interest expense due to higher borrowing costs and increased debt
levels, a $61 million increase in expenses related to CenterPoint Houston's
final fuel reconciliation and a $36 million reduction in non-cash ECOM revenue.

Cumulative Effect of Accounting Change. In connection with the adoption in
2003 of SFAS No. 143, we have identified retirement obligations for nuclear
decommissioning at the South Texas Project and for lignite mine operations which
supply the Limestone electric generation facility. The net difference between
the amounts determined under SFAS No. 143 and the previous method of accounting
for estimated mine reclamation costs was $37 million and has been recorded as a
cumulative effect of accounting change. Upon adoption of SFAS No. 143, we
reversed $115 million of previously recognized removal costs with respect to our
non-rate regulated businesses as a cumulative effect of accounting change. The
total cumulative effect of accounting change from adoption of SFAS No. 143 was
$152 million. Excluded from the $80 million after-tax cumulative effect of
accounting change is minority interest of $19 million related to the Texas Genco
stock not owned by CenterPoint Energy. For additional discussion of the adoption
of SFAS No. 143, please read Note 2(n) to our consolidated financial statements.

2002 COMPARED TO 2001

Income from Continuing Operations. We reported income from continuing
operations before cumulative effect of accounting change of $369 million ($1.23
per diluted share) for 2002 compared to $499 million ($1.71 per diluted share)
for 2001. The $130 million decrease in income from continuing operations before
the cumulative effect of accounting change for 2002 compared to 2001 was
primarily due to a reduction in operating income from our Electric Transmission
and Distribution and Electric Generation business segments of $165 million as a
result of the transition to a deregulated ERCOT market in 2002, which includes
non-cash ECOM revenue of $697 million in 2002, and an increase in interest
expense due to higher borrowing costs ($157 million). Offsetting the above
decreases were increases in operating income of our Natural Gas Distribution and
Pipelines and Gathering business segments of $84 million, primarily resulting
from rate increases at our local gas distribution companies, the absence of $49
million in goodwill amortization expense as a result of adopting SFAS No. 142,
"Goodwill and Other Intangibles" (SFAS No. 142) in 2002 and a reduction in
income taxes of $60 million.

The following table presents operating income (in millions) for each of our
business segments for 2001, 2002 and 2003. Some amounts from the previous years
have been reclassified to conform to the 2003 presentation of the financial
statements. These reclassifications do not affect consolidated net income.

(1) Certain estimates and allocations have been used to separate historical
(pre-January 2002) Electric Generation business segment data from the
Electric Transmission & Distribution business segment data. As a result,
there are no meaningful comparisons for these two business segments prior to
2002.

(2) In 2004, we will no longer be permitted under the Texas electric
restructuring law to record non-cash ECOM revenue.

(3) Usage volumes for commercial and industrial customers are included in total
throughput; however, the majority of these customers are billed on a peak
demand (KW) basis and, as a result, revenues do not vary based on
consumption.

2003 Compared to 2002. The Electric Transmission & Distribution business
segment reported a decrease in operating income of $76 million for 2003 compared
to 2002. Increased revenues from customer

50

growth ($40 million) were more than offset by transition period revenues that
only occurred in 2002 ($90 million) and decreased industrial demand, resulting
in an overall decrease in electric revenues from the regulated electric
transmission and distribution business of $62 million. Additionally, non-cash
ECOM revenue decreased $36 million as a result of higher operating margins at
the Electric Generation business segment based on the state-mandated capacity
auctions. Operation and maintenance expenses decreased in 2003 compared to 2002
primarily due to the absence of purchased power costs that occurred in 2002
during the transition period to deregulation ($48 million), a decrease in labor
costs as a result of work force reductions in 2002 ($13 million), non-recurring
contract services expense primarily related to transition to deregulation in
2002 ($10 million) and lower bad debt expense related to transition revenues in
2002 ($10 million). These decreases were partially offset by an increase in
expenses related to CenterPoint Houston's final fuel reconciliation ($69
million) and an increase in benefits expense primarily due to increased pension
costs ($18 million). Taxes other than income taxes decreased $15 million
primarily due to the absence of gross receipts tax associated with transition
period revenue in the first quarter of 2002 ($9 million).

2002 Compared to 2001. The Electric Transmission & Distribution business
segment, reported an increase in operating income of $233 million for 2002 as
compared to 2001, of which $697 million related to non-cash ECOM revenue
recorded pursuant to the Texas electric restructuring law. Electric revenues
from the regulated electric transmission and distribution business decreased
$575 million primarily as a result of the transition to a deregulated ERCOT
market in 2002. Throughput declined 2% during 2002 as compared to 2001. The
decrease was primarily due to reduced energy delivery in the industrial sector
resulting from self-generation by several major customers, partially offset by
increased residential usage primarily due to non-weather related factors.
Additionally, despite a slowing economy, total metered customers continued to
grow at an annual rate of approximately 2% during the year. Operation and
maintenance expenses decreased in 2002 as compared to 2001 primarily due to a
decrease in factoring expense as a result of the termination of an agreement
under which the Electric Transmission & Distribution business segment had sold
its customer accounts receivable ($77 million) and decreased transmission line
losses in 2002 as this became a cost of retail electric providers in 2002 ($16
million), partially offset by purchased power costs related to operation of the
regulated utility during the transition period to deregulation ($48 million), an
increase in benefits expense ($25 million) which included severance costs in
connection with a reduction in work force by CenterPoint Houston in 2002 and
expenses related to CenterPoint Houston's final fuel reconciliation ($18
million). Depreciation and amortization decreased in 2002 as compared to 2001
primarily as a result of decreased amortization relating to certain regulatory
assets ($64 million) partially offset by increased amortization related to
transition property associated with the transition bonds issued in November 2001
($35 million). Taxes other than income decreased largely as a result of lower
gross receipts taxes ($64 million), which became the responsibility of the
retail electric providers upon deregulation.

(1) Certain estimates and allocations have been used to separate historical
(pre-January 2002) Electric Generation business segment data from the
Electric Transmission & Distribution business segment data. As a result,
there are no meaningful comparisons for these two business segments prior to
2002.

2003 Compared to 2002. Our Electric Generation business segment's
operating income increased $355 million in 2003 compared to 2002 primarily due
to increased operating margins ($357 million) from higher capacity and energy
revenues as a result of higher capacity auction prices driven by higher natural
gas prices, partially offset by increased fuel costs due to higher natural gas
prices and lower sales volumes. Our Electric Generation business segment was
able to partially mitigate the higher cost of natural gas by switching to fuel
oil on some of its flexible natural gas units, as well as benefiting from
reductions in coal and lignite costs on its base-load units resulting from
renegotiated supply agreements and increased utilization of spot purchases.
Additionally, the sale of surplus air emission allowances, which is expected to
recur in 2004, contributed to the increase in operating margins ($16 million).
Partially offsetting the increase in operating margins was a higher level of
operation and maintenance expense primarily related to planned and unplanned
outages ($11 million) and higher pension and insurance expenses ($21 million).
These increases in operation and maintenance expense were partially offset by
expenses incurred in 2002, which did not recur in 2003, the most significant of
which were in connection with an early retirement program and business
separation costs ($28 million).

2002 Compared to 2001. Our Electric Generation business segment's
operating income decreased $398 million in 2002 compared to 2001 primarily due
to decreased revenues resulting from the change from a regulated environment in
2001 to the deregulated ERCOT market ($1.9 billion). The Electric Generation
business segment's 2001 revenue was derived based on actual recoverable
operating expenses plus an allowed regulatory rate of return based on the rate
base while its 2002 revenue was derived from open market sales of capacity and
energy at auction and spot market prices. Additionally, fuel and purchased power
expenses decreased primarily due to lower natural gas prices and a reduction in
overall demand for output from Texas Genco's facilities ($1.4 billion).
Operation and maintenance expense decreased primarily due to an absence of major
maintenance outages at certain of Texas Genco's plants ($36 million in 2001),
which was partially offset by costs related to an early retirement program
implemented in 2002 ($12 million), business separation expenses ($7 million) and
computer systems necessary for operation in the deregulated market ($6 million).
Taxes other than income taxes decreased primarily due to lower tax valuations of
generation assets ($20 million).

2003 Compared to 2002. Our Natural Gas Distribution business segment's
operating income increased $4 million in 2003 compared to 2002 primarily due to
higher revenues from rate increases implemented late in 2002 ($33 million),
improved margins from our unregulated commercial and industrial sales ($6
million) and continued customer growth with the addition of over 38,000
customers since December 2002 ($6 million). These increases were partially
offset by decreased revenues as a result of a decrease in the estimate of
margins earned on unbilled revenues ($11 million). Additionally, operating
income was negatively impacted by higher employee benefit expenses primarily due
to increased pension costs ($13 million), certain costs being included in
operating expense subsequent to the amendment of a receivables facility in
November 2002 as compared to being included in interest expense in the prior
year ($7 million) and increased bad debt expense primarily due to higher gas
prices ($9 million).

2002 Compared to 2001. Our Natural Gas Distribution business segment's
operating income increased $68 million in 2002 compared to 2001 primarily as a
result of improved margins from rate increases in 2002, a 5% increase in
throughput and changes in estimates of unbilled revenues and deferred gas costs,
which reduced operating margins in 2001 ($37 million). Depreciation and
amortization decreased primarily as a result of the discontinuance of goodwill
amortization in 2002 in accordance with SFAS No. 142 as further discussed in
Note 2(d) to our consolidated financial statements ($31 million).

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PIPELINES AND GATHERING

The following table provides summary data of our Pipelines and Gathering
business segment for 2001, 2002 and 2003 (in millions, except throughput data):

2003 Compared to 2002. Our Pipelines and Gathering business segment's
operating income increased $5 million in 2003 compared to 2002. The increase was
primarily a result of increased margins (revenues less fuel costs) due to higher
commodity prices ($8 million), improved margins from new transportation
contracts to power plants ($7 million) and improved margins from enhanced
services in our gas gathering operations ($4 million), partially offset by
higher pension, employee benefit and other miscellaneous expenses ($14 million).
Project work expenses included in operation and maintenance expense decreased
and were offset by a corresponding decrease in revenues billed for these
services ($14 million).

2002 Compared to 2001. Our Pipelines and Gathering business segment's
operating income increased $16 million in 2002 compared to 2001 primarily as a
result of the discontinuance of goodwill amortization in accordance with SFAS
No. 142 as further discussed in Note 2(d) to our consolidated financial
statements ($17 million).

OTHER OPERATIONS

The following table provides summary data for our Other Operations business
segment for 2001, 2002 and 2003 (in millions):

2003 Compared to 2002. Our Other Operations business segment's operating
income in 2003 compared to 2002 decreased $17 million primarily due to changes
in unallocated corporate costs in 2002 as compared to 2003.

2002 Compared to 2001. Our Other Operations business segment's operating
income increased by $65 million in 2002 compared to 2001. The increase was
primarily due to reductions in unallocated corporate costs of ($34 million) and
reductions in corporate accruals, primarily benefits ($27 million).

DISCONTINUED OPERATIONS

On September 30, 2002, CenterPoint Energy distributed all of the shares of
Reliant Resources common stock owned by CenterPoint Energy on a pro-rata basis
to shareholders of CenterPoint Energy common stock. The consolidated financial
statements have been prepared to reflect the effect of the Reliant Resources
Distribution as described above on the CenterPoint Energy consolidated financial
statements. The consolidated financial statements present the Reliant Resources
businesses (Wholesale Energy, European Energy, Retail Energy and related
corporate costs) as discontinued operations in 2001 and 2002 in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
(SFAS No. 144). We also recorded a $4.4 billion non-cash loss on disposal of
these discontinued operations in 2002. This loss represents the excess of the
carrying value of our net investment in Reliant Resources over the market value
of Reliant Resources common stock.

In February 2003, we sold our interest in Argener, a cogeneration facility
in Argentina, for $23 million. The carrying value of this investment was
approximately $11 million as of December 31, 2002. We recorded an after-tax gain
of $7 million from the sale of Argener in the first quarter of 2003. In April
2003, we sold our final remaining investment in Argentina, a 90 percent interest
in Empresa Distribuidora de Electricidad de Santiago del Estero S.A. We recorded
an after-tax loss of $3 million in the second quarter of 2003 related to our
Latin America operations. We have completed our strategy of exiting all of our
international investments. The consolidated financial statements present these
operations as discontinued operations in accordance with SFAS No. 144.

In November 2003, we sold a component of our Other Operations business
segment, CenterPoint Energy Management Services, Inc. (CEMS), that provides
district cooling services in the Houston central business district and related
complementary energy services to district cooling customers and others. We
recorded an after-tax loss of $1 million from the sale of CEMS in the fourth
quarter of 2003. We recorded an after-tax loss in discontinued operations of $16
million ($25 million pre-tax) during the second quarter of 2003 to record the
impairment of the CEMS long-lived assets based on the impending sale and to
record one-time termination benefits. The consolidated financial statements
present these operations as discontinued operations in accordance with SFAS No.
144.

FLUCTUATIONS IN COMMODITY PRICES AND DERIVATIVE INSTRUMENTS

For information regarding our exposure to risk as a result of fluctuations
in commodity prices and derivative instruments, please read "Quantitative and
Qualitative Disclosures About Market Risk" in Item 7A of this report.

55

LIQUIDITY AND CAPITAL RESOURCES

HISTORICAL CASH FLOWS

The net cash provided by/used in operating, investing and financing
activities for 2001, 2002 and 2003 is as follows (in millions):

Net cash provided by operating activities in 2003 increased $573 million
compared to 2002 primarily due to an increase of $355 million in Texas Genco's
operating income substantially due to higher capacity and energy revenues as a
result of higher capacity auction prices driven by higher natural gas prices,
and higher income tax refunds received of $170 million. These increases were
partially offset by higher interest paid related to outstanding borrowings of
$130 million.

Net cash provided by operating activities in 2002 decreased $1.4 billion
compared to 2001. This decrease primarily resulted from refunds of excess
mitigation credits to ratepayers in 2002 of $224 million, lower revenues in the
deregulated ERCOT market, which resulted in a $398 million decrease in Texas
Genco's operating income and a $464 million decrease in CenterPoint Houston's
operating income excluding non-cash income from ECOM, and an increase of $48
million in interest paid related to outstanding borrowings. These decreases were
partially offset by lower income taxes paid of $154 million.

CASH USED IN INVESTING ACTIVITIES

Net cash used in investing activities decreased $99 million during 2003
compared to 2002 due primarily to decreased environmental-related capital
expenditures in our Electric Generation business segment and decreased capital
expenditures in our Electric Transmission & Distribution business segment
primarily resulting from process improvements that included revised construction
and design standards.

Net cash used in investing activities decreased $430 million during 2002
compared to 2001 due primarily to decreased environmental-related capital
expenditures in our Electric Generation business segment and the absence in 2002
of capital expenditures incurred in 2001 in our Electric Transmission &
Distribution business segment related to building infrastructure in preparation
for deregulation.

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

In 2003, debt payments exceeded net loan proceeds by $328 million. In 2002,
net loan proceeds exceeded debt payments by $1.1 billion. Additionally, common
stock dividends paid by us and Texas Genco in 2003 were $187 million less than
in 2002. Since the beginning of 2003, the terms of our credit facility have
limited the common stock dividend to $0.10 per share per quarter.

In 2002, net loan proceeds exceeded debt payments by $1.1 billion. In 2001,
debt payments exceeded net loan proceeds by $702 million. Additionally, common
stock dividends paid in 2002 were $109 million less than in 2001.

56

FUTURE SOURCES AND USES OF CASH

Our liquidity and capital requirements will be affected by:

- capital expenditures;

- debt service requirements;

- various regulatory actions; and

- working capital requirements.

The 1935 Act regulates our financing ability, as more fully described in
"--Certain Contractual and Regulatory Limits on Ability to Issue Securities and
Pay Dividends on Our Common Stock" below.

The following table sets forth our capital expenditures for 2003, and
estimates of our capital requirements for 2004 through 2008 (in millions):

Texas Genco has identified retirement obligations for nuclear
decommissioning at the South Texas Project and the lignite mine operations which
supply its Limestone electric generation facility. Texas Genco has recorded
liabilities as required by SFAS No. 143 of $188 million for the nuclear
decommissioning and $6 million for the lignite mine as of December 31, 2003.
CenterPoint Houston currently funds $2.9 million a year to trusts established to
fund Texas Genco's share of the decommissioning costs for the South Texas
Project. Pursuant to the Texas electric restructuring law, costs associated with
nuclear decommissioning that

57

have not been recovered as of January 1, 2002, will continue to be subject to
cost-of-service rate regulation and will be included in a charge to transmission
and distribution customers. For additional information on asset retirement
obligations and the nuclear decommissioning trust, please read Notes 2(n) and
12(e) to our consolidated financial statements, respectively.

In October 2001, CenterPoint Houston was required by the Texas Utility
Commission to reverse the amount of redirected depreciation and accelerated
depreciation taken for regulatory purposes as allowed under the transition plan
and the Texas electric restructuring law. CenterPoint Houston recorded a
regulatory liability to reflect the prospective refund of the accelerated
depreciation and in January 2002 CenterPoint Houston began refunding excess
mitigation credits, which are to be refunded over a seven-year period. The
annual refund of excess mitigation credits is approximately $238 million. Under
the Texas electric restructuring law, a final determination of these stranded
costs will occur in the 2004 True-Up Proceeding.

Off-Balance Sheet Arrangements. Other than operating leases, we have no
off-balance sheet arrangements. However, we do participate in a receivables
factoring arrangement. In connection with CERC's November 2002 amendment and
extension of its $150 million receivables facility, CERC Corp. formed a
bankruptcy remote subsidiary, which we consolidate, for the sole purpose of
buying receivables created by CERC and selling those receivables to an unrelated
third party. This transaction is accounted for as a sale of receivables under
the provisions of SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", and, as a result, the
related receivables are excluded from the Consolidated Balance Sheet. On June
25, 2003, we elected to reduce the receivables facility to $100 million and in
January 2004, the $100 million receivables facility was replaced with a $250
million receivables facility terminating in January 2005. For additional
information regarding this transaction please read Note 2(i) to our consolidated
financial statements.

In 2003 and February 2004, we and our subsidiaries completed several
capital market transactions which converted a significant amount of our interest
payment obligations from floating rates to fixed rates and refinanced current
maturities of long-term debt. The proceeds of the debt transactions in 2003 were
primarily used to refinance existing short-term debt with long-term debt,
refinance maturing debt and pay related debt issuance costs. Our 2003 capital
market transactions included the following:

In 2003, we and our subsidiaries also entered into new credit facilities
which increased liquidity, reduced financing costs and extended the termination
dates of the facilities they replaced. As of December 31, 2003, we had the
following credit facilities.

(1) Mandatory quarterly payments through September 30, 2005 of $2.5 million per
quarter.

CERC Corp. is currently in discussions with banks seeking to arrange a
replacement revolving credit facility and expects to have such a facility in
place prior to the termination date of the existing facility. In the first
quarter of 2004, CERC replaced its $100 million receivables facility with a $250
million committed one-year receivables facility. The bankruptcy remote
subsidiary established in 2002 continues to buy CERC's receivables and sell them
to an unrelated third party.

Additionally, in February 2004, $56 million aggregate principal amount of
collateralized 5.60% pollution control bonds due 2027 and $44 million aggregate
principal amount of 4.25% collateralized insurance-backed pollution control
bonds due 2017 were issued on behalf of CenterPoint Houston. The pollution
control bonds are collateralized by general mortgage bonds of CenterPoint
Houston with principal amounts, interest rates and maturities that match the
pollution control bonds. The proceeds were used to redeem two series of 6.7%
collateralized pollution control bonds with an aggregate principal amount of
$100 million issued on our behalf. CenterPoint Houston's 6.7% first mortgage
bonds which collateralized our payment obligations under the refunded pollution
control bonds were retired in connection with the March 2004 redemption of the
refunded pollution control bonds. CenterPoint Houston's 6.7% notes payable to us
were extinguished upon the redemption of the refunded pollution control bonds.

On December 31, 2003, we had temporary external investments of $66 million.

At December 31, 2003, CenterPoint Energy had a shelf registration statement
covering 15 million shares of common stock and CERC Corp. had a shelf
registration statement covering $50 million principal amount of debt securities.

Cash Requirements in 2004. Our liquidity and capital requirements are
affected primarily by our results of operations, capital expenditures, debt
service requirements, and working capital needs. Our principal cash requirements
during 2004, assuming we continue to own our interest in Texas Genco for the
full year, include the following:

- approximately $694 million of capital expenditures;

- an estimated $238 million in refunds by CenterPoint Houston of excess
mitigation credits;

- dividend payments on CenterPoint Energy common stock;

- $51 million of maturing long-term debt, including $41 million of
transition bonds; and

- maturity of any borrowings under CERC's $200 million revolving credit
agreement.

We expect that revolving credit borrowings and anticipated cash flows from
operations will be sufficient to meet our cash needs for 2004. Our $2.3 billion
credit facility provides that, until such time as the credit facility has been
reduced to $750 million, all of the net cash proceeds from any securitizations
relating to the recovery of the true-up components, after making any payments
required under CenterPoint Houston's term loan, and the net cash proceeds of any
sales of the common stock of Texas Genco that we own or of material portions of

59

Texas Genco's assets shall be applied to repay borrowings under our credit
facility and reduce the amount available under the credit facility. Our $2.3
billion credit facility contains no other restrictions with respect to our use
of proceeds from financing activities. CenterPoint Houston's term loan requires
the proceeds from the issuance of transition bonds to be used to reduce the term
loan unless refused by the lenders. CenterPoint Houston's term loan, subject to
certain exceptions, limits the application of proceeds from capital markets
transactions by CenterPoint Houston over $200 million to repayment of debt
existing in November 2002.

CenterPoint Houston will distribute recovery of the true-up components not
used to repay indebtedness to us through either the payment of dividends or the
settlement of intercompany payables. We can then move funds back to CenterPoint
Houston, either through equity or intercompany debt, in order to maintain
CenterPoint Houston's capital structure at the appropriate levels. Under the
orders described under "-- Certain Contractual and Regulatory Limits on Ability
to Issue Securities and Pay Dividends on Our Common Stock," CenterPoint
Houston's member's equity as a percentage of total capitalization must be at
least 30%, although the SEC has permitted the percentage to be below this level
for other companies taking into account non-recourse securitization debt as a
component of capitalization.

Impact on Liquidity of a Downgrade in Credit Ratings. As of March 1, 2004,
Moody's Investors Service, Inc. (Moody's), Standard & Poor's Ratings Services, a
division of The McGraw Hill Companies (S&P), and Fitch, Inc. (Fitch) had
assigned the following credit ratings to senior debt of CenterPoint Energy and
certain subsidiaries:

(1) A "negative" outlook from Moody's reflects concerns over the next 12 to 18
months which will either lead to a review for a potential downgrade or a
return to a stable outlook.

(2) An S&P rating outlook assesses the potential direction of a long-term credit
rating over the intermediate to longer term.

(3) A "negative" outlook from Fitch encompasses a one-to-two year horizon as to
the likely ratings direction.

On February 27, 2004, Moody's announced that it was downgrading our senior
unsecured debt to Ba2 from Ba1. Moody's explained in its announcement that the
action was to reflect the structural differences in rights and claims afforded
to our senior secured bank lenders, who benefit from their priority claim on
proceeds from the monetization of Texas Genco and from the up-streaming of
proceeds resulting from securitization of the true-up components at CenterPoint
Houston. Moody's announced that its action concluded a review for possible
downgrade of us that it initiated in October 2003. Moody's retained a negative
ratings outlook for us and for our subsidiaries CERC Corp. and CenterPoint
Houston, but their ratings remain unchanged.

We cannot assure you that these ratings will remain in effect for any given
period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. Any future reduction or withdrawal of one or
more of our credit ratings could have a material adverse impact on our ability
to obtain short- and long-term financing, the cost of such financings and the
execution of our commercial strategies.

A decline in credit ratings would increase borrowing costs under CERC's
$200 million revolving credit facility. A decline in credit ratings would also
increase the interest rate on long-term debt to be issued in the capital markets
and would negatively impact our ability to complete capital market transactions.
If we were

60

unable to maintain an investment-grade rating from at least one rating agency,
as a registered public utility holding company we would be required to obtain
further approval from the SEC for any additional capital markets transactions as
more fully described in "-- Certain Contractual and Regulatory Limits on Ability
to Issue Securities and Pay Dividends on Our Common Stock" below. Additionally,
a decline in credit ratings could increase cash collateral requirements that
could exist in connection with certain contracts relating to gas purchases, gas
price hedging and gas storage activities of our Natural Gas Distribution
business segment.

Our revolving credit facilities contain "material adverse change" clauses
that could impact our ability to make new borrowings under these facilities. The
"material adverse change" clauses in our revolving credit facilities generally
relate to an event, development or circumstance that has or would reasonably be
expected to have a material adverse effect on (a) the business, financial
condition or operations of the borrower and its subsidiaries taken as a whole,
or (b) the legality, validity or enforceability of the loan documents.

In September 1999, we issued 2.0% Zero-Premium Exchangeable Subordinated
Notes due 2029 (ZENS) having an original principal amount of $1.0 billion. Each
ZENS note is exchangeable at the holder's option at any time for an amount of
cash equal to 95% of the market value of the reference shares of Time Warner
Inc. (TW Common) attributable to each ZENS note. If our creditworthiness were to
drop such that ZENS note holders thought our liquidity was adversely affected or
the market for the ZENS notes were to become illiquid, some ZENS noteholders
might decide to exchange their ZENS notes for cash. Funds for the payment of
cash upon exchange could be obtained from the sale of the shares of TW Common
that we own or from other sources. We own shares of TW Common equal to 100% of
the reference shares used to calculate our obligation to the holders of the ZENS
notes. ZENS note exchanges result in a cash outflow because deferred tax
liabilities related to the ZENS notes and TW Common shares become current tax
obligations when ZENS notes are exchanged and TW Common shares are sold.

CenterPoint Energy Gas Services, Inc. (CEGS), a wholly owned subsidiary of
CERC Corp., provides comprehensive natural gas sales and services to industrial
and commercial customers which are primarily located within or near the
territories served by our pipelines and natural gas distribution subsidiaries.
In order to hedge its exposure to natural gas prices, CEGS has agreements with
provisions standard for the industry that establish credit thresholds and
require a party to provide additional collateral on two business days' notice
when that party's rating or the rating of a credit support provider for that
party (CERC Corp. in this case) falls below those levels. As of December 31,
2003, the senior unsecured debt of CERC Corp. was rated BBB by S&P and Ba1 by
Moody's. We estimate that as of December 31, 2003, unsecured credit limits
extended to CEGS by counterparties could aggregate $62 million; however,
utilized credit capacity is significantly lower.

Cross Defaults. Under our revolving credit facility and our term loan, a
payment default on, or a non-payment default that permits acceleration of, any
indebtedness exceeding $50 million by us or any of our significant subsidiaries
will cause a default. Pursuant to the indenture governing our senior notes, a
payment default by us, CERC Corp. or CenterPoint Houston in respect of, or an
acceleration of, borrowed money and certain other specified types of
obligations, in the aggregate principal amount of $50 million will cause a
default. As of February 29, 2004, we had issued five series of senior notes
aggregating $1.4 billion in principal amount under this indenture. A default by
CenterPoint Energy would not trigger a default under our subsidiaries' debt
instruments.

Pension Plan. As discussed in Note 10 to the consolidated financial
statements, we maintain a non-contributory pension plan covering substantially
all employees. Employer contributions are based on actuarial computations that
establish the minimum contribution required under the Employee Retirement Income
Security Act of 1974 (ERISA) and the maximum deductible contribution for income
tax purposes. No contributions were made to the plan during 2002. At December
31, 2002 and 2003, the projected benefit obligation exceeded the market value of
plan assets by $496 million and $498 million, respectively. In September 2003,
we elected to make a $22.7 million contribution to our pension plan. As a
result, we will not be required to make any contributions to our pension plan
prior to 2005. Changes in interest rates and the market values of the securities
held by the plan during 2004 could materially, positively or negatively, change
our under-funded status and affect the level of pension expense and required
contributions in 2005 and

61

beyond. Plan assets used to satisfy pension obligations have been adversely
impacted by the decline in equity market values prior to 2003.

Under the terms of our pension plan, we reserve the right to change, modify
or terminate the plan. Our funding policy is to review amounts annually and
contribute an amount at least equal to the minimum contribution required under
ERISA.

In accordance with SFAS No. 87, "Employers' Accounting for Pensions,"
changes in pension obligations and assets may not be immediately recognized as
pension costs in the income statement, but generally are recognized in future
years over the remaining average service period of plan participants. As such,
significant portions of pension costs recorded in any period may not reflect the
actual level of benefit payments provided to plan participants.

Pension costs were $39 million, $35 million and $90 million for 2001, 2002
and 2003, respectively. Included in the net pension cost in 2001 was $45 million
of expense related to Reliant Resources' participants. For 2002, a pension
benefit of $4 million was recorded related to Reliant Resources' participants.
Pension benefit and expense for Reliant Resources' participants are reflected in
the Statement of Consolidated Operations as discontinued operations.
Additionally, we maintain a non-qualified benefit restoration plan which allows
participants to retain the benefits to which they would have been entitled under
our non-contributory pension plan except for the federally mandated limits on
these benefits or on the level of compensation on which these benefits may be
calculated. The expense associated with this non-qualified plan was $25 million,
$9 million and $8 million in 2001, 2002 and 2003, respectively. Included in the
cost in 2001 and 2002 is $17 million and $3 million, respectively, of expense
related to Reliant Resources' participants, which is reflected in discontinued
operations in the Statements of Consolidated Operations.

The calculation of pension expense and related liabilities requires the use
of assumptions. Changes in these assumptions can result in different expense and
liability amounts, and future actual experience can differ from the assumptions.
Two of the most critical assumptions are the expected long-term rate of return
on plan assets and the assumed discount rate.

As of December 31, 2003, the expected long-term rate of return on plan
assets was 9.0%. We believe that our actual asset allocation on average will
approximate the targeted allocation and the estimated return on net assets. We
regularly review our actual asset allocation and periodically rebalance plan
assets as appropriate.

As of December 31, 2003, the projected benefit obligation was calculated
assuming a discount rate of 6.25%, which is a .5% decline from the 6.75%
discount rate assumed in 2002. The discount rate was determined by reviewing
yields on high-quality bonds that receive one of the two highest ratings given
by a recognized rating agency and the expected duration of pension obligation
specific to the characteristics of our plan.

Pension expense for 2004, including the benefit restoration plan, is
estimated to be $82 million based on an expected return on plan assets of 9.0%
and a discount rate of 6.25% as of December 31, 2003. If the expected return
assumption were lowered by .5% (from 9.0% to 8.5%), 2004 pension expense would
increase by approximately $6 million. Similarly, if the discount rate were
lowered by .5% (from 6.25% to 5.75%), this assumption change would increase our
projected benefit obligation, pension liabilities and 2004 pension expense by
approximately $121 million, $111 million and $10 million, respectively. In
addition, the assumption change would result in an additional charge to
comprehensive income during 2004 of $72 million, net of tax.

Primarily due to the decline in the market value of the pension plan's
assets and increased benefit obligations associated with a reduction in the
discount rate, the value of the plan's assets is less than our accumulated
benefit obligation. As a result, we recorded a non-cash minimum liability
adjustment, which resulted in a charge to other comprehensive income during the
fourth quarter of 2002 of $414 million, net of tax. In December 2003, we
recorded a minimum liability adjustment in the Consolidated Balance Sheet ($72
million decrease in pension liability) to reflect a liability equal to the
unfunded accumulated benefit obligation, with an offsetting credit of $47
million to equity, net of a $25 million deferred tax effect.

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Future changes in plan asset returns, assumed discount rates and various
other factors related to the pension plan will impact our future pension expense
and liabilities. We cannot predict with certainty what these factors will be in
the future.

Other Factors that Could Affect Cash Requirements. In addition to the
above factors, our liquidity and capital resources could be affected by:

- acceleration of payment dates on certain gas supply contracts under
certain circumstances, as a result of increased gas prices and
concentration of suppliers;

- increased costs related to the acquisition of gas for storage;

- increases in interest expense in connection with debt refinancings;

- various regulatory actions; and

- the ability of Reliant Resources and its subsidiaries to satisfy their
obligations as the principal customers of CenterPoint Houston and Texas
Genco and in respect of Reliant Resources' indemnity obligations to us
and our subsidiaries.

Money Pool. We have two "money pools" through which our participating
subsidiaries can borrow or invest on a short-term basis. Funding needs are
aggregated and external borrowing or investing is based on the net cash
position. Prior to October 2003, we had only one money pool. Following Texas
Genco's certification by FERC as an "exempt wholesale generator" under the 1935
Act in October 2003, it could no longer participate with our regulated
subsidiaries in the same money pool. In October 2003, we established a second
money pool in which Texas Genco and certain of our other unregulated
subsidiaries can participate.

The net funding requirements of the money pool in which our regulated
subsidiaries participate are expected to be met with loans and revolving credit
facilities. Except in an emergency situation (in which case we could provide
funding pursuant to applicable SEC rules), we would be required to obtain
approval from the SEC to issue and sell securities for purposes of funding Texas
Genco's operations via the money pool established in October 2003. The terms of
both money pools are in accordance with requirements applicable to registered
public utility holding companies under the 1935 Act and under an order from the
SEC relating to our financing activities and those of our subsidiaries on June
30, 2003 (June 2003 Financing Order).

Certain Contractual and Regulatory Limits on Ability to Issue Securities
and Pay Dividends on Our Common Stock. Factors affecting our ability to issue
securities, pay dividends on our common stock or take other actions that affect
our capitalization include:

- covenants and other provisions in our credit or loan facilities and the
credit facilities and receivables facility of our subsidiaries and other
borrowing agreements; and

- limitations imposed on us as a registered public utility holding company
under the 1935 Act.

The collateralized term loan of CenterPoint Houston limits its debt,
excluding transition bonds, as a percentage of its total capitalization to 68%.
CERC Corp.'s bank facility and its receivables facility limit CERC's debt as a
percentage of its total capitalization to 60% and contain an earnings before
interest, taxes, depreciation and amortization (EBITDA) to interest covenant.
CERC Corp.'s bank facility also contains a provision that could, under certain
circumstances, limit the amount of dividends that could be paid by CERC Corp.
Our $2.3 billion revolving credit and term loan facility limits dividend
payments as described above, contains a debt to EBITDA covenant, an EBITDA to
interest covenant and restrictions on the use of proceeds from certain debt
issuances and certain asset sales. These facilities include certain restrictive
covenants. We and our subsidiaries are in compliance with such covenants.

We are a registered public utility holding company under the 1935 Act. The
1935 Act and related rules and regulations impose a number of restrictions on
our activities and those of our subsidiaries other than Texas

63

Genco. The 1935 Act, among other things, limits our ability and the ability of
our regulated subsidiaries to issue debt and equity securities without prior
authorization, restricts the source of dividend payments to current and retained
earnings without prior authorization, regulates sales and acquisitions of
certain assets and businesses and governs affiliate transactions.

The June 2003 Financing Order is effective until June 30, 2005.
Additionally, we have received several subsequent orders which provide
additional financing authority. These orders establish limits on the amount of
external debt and equity securities that can be issued by us and our regulated
subsidiaries without additional authorization but generally permit us to
refinance our existing obligations and those of our regulated subsidiaries. Each
of us and our subsidiaries is in compliance with the authorized limits.
Discussed below are the incremental amounts of debt and equity that we are
authorized to issue after giving effect to our capital markets transactions in
2003 and the first two months of 2004. The orders also permit utilization of
undrawn credit facilities at CenterPoint Energy and CERC. As of March 1, 2004:

- CenterPoint Energy is authorized to issue an additional aggregate $250
million of preferred stock, preferred securities and equity-linked
securities, $160 million of debt and 199 million shares of common stock;

- CenterPoint Houston is authorized to issue an additional aggregate $161
million of debt and an aggregate $250 million of preferred stock and
preferred securities; and

- CERC is authorized to issue an additional $2 million of debt and an
additional aggregate $250 million of preferred stock and preferred
securities.

The SEC has reserved jurisdiction over, and must take further action to
permit, the issuance of $478 million of additional debt at CenterPoint Energy,
$480 million of additional debt at CERC and $250 million of additional debt at
CenterPoint Houston.

The orders require that if we or any of our regulated subsidiaries issue
securities that are rated by a nationally recognized statistical rating
organization (NRSRO), the security to be issued must obtain an investment grade
rating from at least one NRSRO and, as a condition to such issuance, all
outstanding rated securities of the issuer and of CenterPoint Energy must be
rated investment grade by at least one NRSRO. The orders also contain certain
requirements for interest rates, maturities, issuance expenses and use of
proceeds.

The 1935 Act limits the payment of dividends to payment from current and
retained earnings unless specific authorization is obtained to pay dividends
from other sources. The SEC has reserved jurisdiction over payment of $500
million of dividends from CenterPoint Energy's unearned surplus or capital.
Further authorization would be required to make those payments. As of December
31, 2003, we had a retained deficit on our Consolidated Balance Sheet. We expect
to pay dividends out of current earnings. If as a result of the 2004 True-Up
Proceeding or any other event we are required to take a charge against our net
income, our current earnings could be reduced below the level which would enable
us to pay the quarterly dividend on our common stock under our current SEC
financing order. We expect to file an application with the SEC under the 1935
Act requesting an order authorizing us, in the event that we are required to
take such a charge against our net income, to pay quarterly dividends out of
capital or unearned surplus. The June 2003 Financing Order requires that
CenterPoint Houston and CERC maintain a ratio of common equity to total
capitalization of thirty percent (30%).

Security Interests in Receivables of Reliant Resources. Pursuant to a
Master Power Purchase and Sale Agreement (as amended) with a subsidiary of
Reliant Resources related to power sales in the ERCOT market, Texas Genco has
been granted a security interest in accounts receivable and/or notes associated
with the accounts receivable of certain subsidiaries of Reliant Resources to
secure up to $250 million in purchase obligations.

64

CRITICAL ACCOUNTING POLICIES

A critical accounting policy is one that is both important to the
presentation of our financial condition and results of operations and requires
management to make difficult, subjective or complex accounting estimates. An
accounting estimate is an approximation made by management of a financial
statement element, item or account in the financial statements. Accounting
estimates in our historical consolidated financial statements measure the
effects of past business transactions or events, or the present status of an
asset or liability. The accounting estimates described below require us to make
assumptions about matters that are highly uncertain at the time the estimate is
made. Additionally, different estimates that we could have used or changes in an
accounting estimate that are reasonably likely to occur could have a material
impact on the presentation of our financial condition or results of operations.
The circumstances that make these judgments difficult, subjective and/or complex
have to do with the need to make estimates about the effect of matters that are
inherently uncertain. Estimates and assumptions about future events and their
effects cannot be predicted with certainty. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments. These estimates may change as new events occur, as more experience is
acquired, as additional information is obtained and as our operating environment
changes. Our significant accounting policies are discussed in Note 2 to our
consolidated financial statements. We believe the following accounting policies
involve the application of critical accounting estimates. Accordingly, these
accounting estimates have been reviewed and discussed with the audit committee
of the board of directors.

ACCOUNTING FOR RATE REGULATION

SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS No. 71), provides that rate-regulated entities account for and report
assets and liabilities consistent with the recovery of those incurred costs in
rates if the rates established are designed to recover the costs of providing
the regulated service and if the competitive environment makes it probable that
such rates can be charged and collected. Application of SFAS No. 71 to the
electric generation portion of our business was discontinued as of June 30,
1999. Our Electric Transmission & Distribution business continues to apply SFAS
No. 71 which results in our accounting for the regulatory effects of recovery of
stranded costs and other regulatory assets resulting from the unbundling of the
transmission and distribution business from our electric generation operations
in our consolidated financial statements. Certain expenses and revenues subject
to utility regulation or rate determination normally reflected in income are
deferred on the balance sheet and are recognized in income as the related
amounts are included in service rates and recovered from or refunded to
customers. Significant accounting estimates embedded within the application of
SFAS No. 71 with respect to our Electric Transmission & Distribution business
segment relate to $2.1 billion of recoverable electric generation plant
mitigation assets (stranded costs) and $1.4 billion of ECOM true-up as of
December 31, 2003. The stranded costs include $1.1 billion of previously
recorded accelerated depreciation and $841 million of previously redirected
depreciation as well as $399 million related to the Texas Genco distribution.
These stranded costs are recoverable under the provisions of the Texas electric
restructuring law. The ultimate amount of stranded cost recovery is subject to a
final determination, which will occur in 2004, and is contingent upon the market
value of Texas Genco. Any significant changes in our accounting estimate of
stranded costs as a result of current market conditions or changes in the
regulatory recovery mechanism currently in place could result in a material
write-down of these regulatory assets.

IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES

We review the carrying value of our long-lived assets, including goodwill
and identifiable intangibles, whenever events or changes in circumstances
indicate that such carrying values may not be recoverable, and annually for
goodwill as required by SFAS No. 142. Unforeseen events and changes in
circumstances and market condition and material differences in the value of
long-lived assets and intangibles due to changes in estimates of future cash
flows, regulatory matters and operating costs could negatively affect the fair
value of our assets and result in an impairment charge.

65

Fair value is the amount at which the asset could be bought or sold in a
current transaction between willing parties and may be estimated using a number
of techniques, including quoted market prices or valuations by third parties,
present value techniques based on estimates of cash flows, or multiples of
earnings or revenue performance measures. The fair value of the asset could be
different using different estimates and assumptions in these valuation
techniques.

We have engaged a financial advisor to assist in exploring alternatives for
monetizing our 81% interest in Texas Genco, including possible sale of our
ownership interest in Texas Genco. As a result of our intention to monetize our
interest in Texas Genco, we performed an impairment analysis of Texas Genco's
assets as of December 31, 2003 in accordance with the provisions of SFAS No.
144. As of December 31, 2003 no impairment had been indicated. The fair value of
our Texas Genco assets could be materially affected by a change in the estimated
future cash flows for these assets. We estimate future cash flows for Texas
Genco using a probability-weighted approach based on the fair value of its
common stock, operating projections and estimates of how long we will retain
these assets. Changes in any of these assumptions, including the timing of a
possible sale, could result in an impairment charge.

UNBILLED ENERGY REVENUES

Revenues related to the sale and/or delivery of electricity or natural gas
(energy) are generally recorded when energy is delivered to customers. However,
the determination of energy sales to individual customers is based on the
reading of their meters, which is performed on a systematic basis throughout the
month. At the end of each month, amounts of energy delivered to customers since
the date of the last meter reading are estimated and the corresponding unbilled
revenue is estimated. Unbilled electric delivery revenue is estimated each month
based on daily supply volumes, applicable rates and analyses reflecting
significant historical trends and experience. Unbilled natural gas sales are
estimated based on estimated purchased gas volumes, estimated lost and
unaccounted for gas and tariffed rates in effect. As additional information
becomes available, or actual amounts are determinable, the recorded estimates
are revised. Consequently, operating results can be affected by revisions to
prior accounting estimates.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 2(n) to the consolidated financial statements for a discussion of
new accounting pronouncements that affect us.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

IMPACT OF CHANGES IN INTEREST RATES AND ENERGY COMMODITY PRICES

We are exposed to various market risks. These risks arise from transactions
entered into in the normal course of business and are inherent in our
consolidated financial statements. Most of the revenues and income from our
business activities are impacted by market risks. Categories of market risk
include exposure to commodity prices through non-trading activities, interest
rates and equity prices. A description of each market risk is set forth below:

- Commodity price risk results from exposures to changes in spot prices,
forward prices and price volatilities of commodities, such as natural gas
and other energy commodities risk.

- Interest rate risk primarily results from exposures to changes in the
level of borrowings and changes in interest rates.

Management has established comprehensive risk management policies to
monitor and manage these market risks. We manage these risk exposures through
the implementation of our risk management policies and framework. We manage our
exposures through the use of derivative financial instruments and derivative
commodity instrument contracts. During the normal course of business, we review
our hedging strategies and determine the hedging approach we deem appropriate
based upon the circumstances of each situation.

66

Derivative instruments such as futures, forward contracts, swaps and
options derive their value from underlying assets, indices, reference rates or a
combination of these factors. These derivative instruments include negotiated
contracts, which are referred to as over-the-counter derivatives, and
instruments that are listed and traded on an exchange.

Derivative transactions are entered into in our non-trading operations to
manage and hedge certain exposures, such as exposure to changes in gas prices.
We believe that the associated market risk of these instruments can best be
understood relative to the underlying assets or risk being hedged.

INTEREST RATE RISK

We have outstanding long-term debt, bank loans, mandatory redeemable
preferred securities of subsidiary trusts holding solely our junior subordinated
debentures (trust preferred securities), securities held in our nuclear
decommissioning trusts, some lease obligations and our obligations under our
2.0% Zero-Premium Exchangeable Subordinated Notes due 2029 (ZENS) that subject
us to the risk of loss associated with movements in market interest rates. In
2003, we had interest rate swaps in place in order to hedge portions of our
floating-rate debt.

Our floating-rate obligations aggregated $5.5 billion and $2.8 billion at
December 31, 2002 and 2003, respectively. If the floating interest rates were to
increase by 10% from December 31, 2003 rates, our combined interest expense
would increase by a total of $2.0 million each month in which such increase
continued.

At December 31, 2002 and 2003, we had outstanding fixed-rate debt
(excluding indexed debt securities) and trust preferred securities aggregating
$5.4 billion and $8.1 billion, respectively, in principal amount and having a
fair value of $5.4 billion and $8.6 billion, respectively. These instruments are
fixed-rate and, therefore, do not expose us to the risk of loss in earnings due
to changes in market interest rates (please read Note 9 to our consolidated
financial statements). However, the fair value of these instruments would
increase by approximately $461 million if interest rates were to decline by 10%
from their levels at December 31, 2003. In general, such an increase in fair
value would impact earnings and cash flows only if we were to reacquire all or a
portion of these instruments in the open market prior to their maturity.

CenterPoint Houston contributed $14.8 million in 2001 to trusts established
to fund Texas Genco's share of the decommissioning costs for the South Texas
Project. In both 2002 and 2003, CenterPoint Houston contributed $2.9 million to
these trusts. The securities held by the trusts for decommissioning costs had an
estimated fair value of $189 million as of December 31, 2003, of which
approximately 37% were fixed-rate debt securities that subject us to risk of
loss of fair value with movements in market interest rates. If interest rates
were to increase by 10% from their levels at December 31, 2003, the decrease in
fair value of the fixed-rate debt securities would be approximately $1 million.
In addition, the risk of an economic loss is mitigated. Any unrealized gains or
losses are accounted for in accordance with SFAS No. 71 as a regulatory
asset/liability because we believe that CenterPoint Houston's future
contributions, which are currently recovered through the ratemaking process,
will be adjusted for these gains and losses. For further discussion regarding
the recovery of decommissioning costs pursuant to the Texas electric
restructuring law, please read Note 4(a) to our consolidated financial
statements.

As discussed in Note 7 to our consolidated financial statements, upon
adoption of SFAS No. 133 effective January 1, 2001, the ZENS obligation was
bifurcated into a debt component and a derivative component. The debt component
of $105 million at December 31, 2003 is a fixed-rate obligation and, therefore,
does not expose us to the risk of loss in earnings due to changes in market
interest rates. However, the fair value of the debt component would increase by
approximately $16 million if interest rates were to decline by 10% from levels
at December 31, 2003. Changes in the fair value of the derivative component,
$321 million at December 31, 2003, are recorded in our Statements of
Consolidated Operations and, therefore, we are exposed to changes in the fair
value of the derivative component as a result of changes in the underlying
risk-free interest rate. If the risk-free interest rate were to increase by 10%
from December 31, 2003 levels, the fair value of the derivative component would
increase by approximately $5 million, which would be recorded as an unrealized
loss in our Statements of Consolidated Operations.

67

As of December 31, 2003, we had an interest rate swap having a notional
amount of $250 million to fix the interest rate applicable to floating rate
debt. At December 31, 2003, the swap could be terminated at a cost of $1
million. The swap, which expired in January 2004, did not qualify as a cash flow
hedge under SFAS No. 133, and was marked to market in our Consolidated Balance
Sheets with changes reflected in interest expense in the Statements of
Consolidated Operations. A decrease of 10% in the December 31, 2003 level of
interest rates would have no impact.

We are exposed to equity market value risk through our ownership of 21.6
million shares of TW Common, which are held by us to facilitate our ability to
meet our obligations under the ZENS. Please read Note 7 to our consolidated
financial statements for a discussion of the effect of adoption of SFAS No. 133
on our ZENS obligation and our historical accounting treatment of our ZENS
obligation. A decrease of 10% from the December 31, 2003 market value of TW
Common would result in a net loss of approximately $3 million, which would be
recorded as a loss in our Statements of Consolidated Operations.

As discussed above under "-- Interest Rate Risk," CenterPoint Houston
contributes to trusts established to fund Texas Genco's share of the
decommissioning costs for the South Texas Project, which held debt and equity
securities as of December 31, 2003. The equity securities expose us to losses in
fair value. If the market prices of the individual equity securities were to
decrease by 10% from their levels at December 31, 2003, the resulting loss in
fair value of these securities would be approximately $12 million. Currently,
the risk of an economic loss is mitigated as discussed above under "-- Interest
Rate Risk."

COMMODITY PRICE RISK FROM NON-TRADING ACTIVITIES

To reduce our commodity price risk from market fluctuations in the revenues
derived from the sale of natural gas and related transportation, we enter into
forward contracts, swaps and options (Non-Trading Energy Derivatives) in order
to hedge some expected purchases of natural gas and sales of natural gas (a
portion of which are firm commitments at the inception of the hedge).
Non-Trading Energy Derivatives are also utilized to fix the price of future
operational gas requirements.

We use derivative instruments as economic hedges to offset the commodity
exposure inherent in our businesses. The stand-alone commodity risk created by
these instruments, without regard to the offsetting effect of the underlying
exposure these instruments are intended to hedge, is described below. We measure
the commodity risk of our Non-Trading Energy Derivatives using a sensitivity
analysis. The sensitivity analysis performed on our Non-Trading Energy
Derivatives measures the potential loss in earnings based on a hypothetical 10%
movement in energy prices. A decrease of 10% in the market prices of energy
commodities from their December 31, 2002 levels would have decreased the fair
value of our Non-Trading Energy Derivatives by $12 million. A decrease of 10% in
the market prices of energy commodities from their December 31, 2003 levels
would have decreased the fair value of our Non-Trading Energy Derivatives by $50
million.

The above analysis of the Non-Trading Energy Derivatives utilized for
hedging purposes does not include the favorable impact that the same
hypothetical price movement would have on our physical purchases and sales of
natural gas to which the hedges relate. Furthermore, the Non-Trading Energy
Derivative portfolio is managed to complement the physical transaction
portfolio, reducing overall risks within limits. Therefore, the adverse impact
to the fair value of the portfolio of Non-Trading Energy Derivatives held for
hedging purposes

68

associated with the hypothetical changes in commodity prices referenced above
would be offset by a favorable impact on the underlying hedged physical
transactions, assuming:

- the Non-Trading Energy Derivatives are not closed out in advance of their
expected term;

- the Non-Trading Energy Derivatives continue to function effectively as
hedges of the underlying risk; and

If any of the above-mentioned assumptions ceases to be true, a loss on the
derivative instruments may occur, or the options might be worthless as
determined by the prevailing market value on their termination or maturity date,
whichever comes first. Non-Trading Energy Derivatives designated and effective
as hedges, may still have some percentage which is not effective. The change in
value of the Non-Trading Energy Derivatives that represents the ineffective
component of the hedges is recorded in our results of operations.

We have established a Risk Oversight Committee, comprised of corporate and
business segment officers, that oversees commodity price and credit risk
activities, including trading, marketing, risk management services and hedging
activities. The committee's duties are to establish commodity risk policies,
allocate risk capital, approve trading of new products and commodities, monitor
risk positions and ensure compliance with the risk management policies and
procedures and trading limits established by our board of directors.

Our policies prohibit the use of leveraged financial instruments. A
leveraged financial instrument, for this purpose, is a transaction involving a
derivative whose financial impact will be based on an amount other than the
notional amount or volume of the instrument.

CenterPoint Energy, Inc. (CenterPoint Energy or the Company) is a public
utility holding company, created on August 31, 2002 as part of a corporate
restructuring of Reliant Energy, Incorporated (Reliant Energy) that implemented
certain requirements of the Texas electric restructuring law described below. In
December 2000, Reliant Energy transferred a significant portion of its
unregulated businesses to Reliant Resources, Inc. (Reliant Resources), which, at
the time, was a wholly owned subsidiary of Reliant Energy.

On September 30, 2002, following Reliant Resources' initial public offering
of approximately 20% of its common stock in May 2001, CenterPoint Energy
distributed all of the shares of Reliant Resources common stock owned by
CenterPoint Energy to its common shareholders on a pro-rata basis (the Reliant
Resources Distribution).

CenterPoint Energy is the successor to Reliant Energy for financial
reporting purposes under the Securities Exchange Act of 1934. The Company's
operating subsidiaries own and operate electric transmission and distribution
facilities, natural gas distribution facilities, natural gas pipelines and
electric generating plants. CenterPoint Energy is a registered public utility
holding company under the Public Utility Holding Company Act of 1935, as amended
(1935 Act). The 1935 Act and related rules and regulations impose a number of
restrictions on the activities of the Company and those of its subsidiaries
other than Texas Genco Holdings, Inc. (Texas Genco). The 1935 Act, among other
things, limits the ability of the Company and its regulated subsidiaries to
issue debt and equity securities without prior authorization, restricts the
source of dividend payments to current and retained earnings without prior
authorization, regulates sales and acquisitions of certain assets and businesses
and governs affiliate transactions.

As of December 31, 2003, the Company's indirect wholly owned subsidiaries
included:

- CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which
engages in the electric transmission and distribution business in a
5,000-square mile area of the Texas Gulf Coast that includes Houston; and

CenterPoint Energy also has an approximately 81% ownership interest in
Texas Genco, which owns and operates a portfolio of generating assets located in
Texas. CenterPoint Energy distributed approximately 19% of the 80 million
outstanding shares of common stock of Texas Genco to its shareholders on January
6, 2003 (Texas Genco Distribution). As a result of the Texas Genco Distribution,
CenterPoint Energy recorded an impairment charge of $399 million, which is
reflected as a regulatory asset representing stranded costs in the Consolidated
Balance Sheets as of December 31, 2003. This impairment charge represents the
excess of the carrying value of CenterPoint Energy's net investment in Texas
Genco over the market value of the Texas Genco common stock that was
distributed. The financial impact of this impairment was offset by recording a
$399 million regulatory asset reflecting CenterPoint Energy's expectation of
stranded cost recovery of such impairment. Additionally, in connection with the
Texas Genco Distribution, CenterPoint Energy recorded minority interest
ownership in Texas Genco of $146 million in its Consolidated Balance Sheets in
the first quarter of 2003.

BASIS OF PRESENTATION

The consolidated financial statements have been prepared to reflect the
effect of the Reliant Resources Distribution on the CenterPoint Energy financial
statements. The consolidated financial statements present the Reliant Resources
businesses (Wholesale Energy, European Energy, Retail Energy and related
corporate

75

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

costs) as discontinued operations, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" (SFAS No. 144). Accordingly, the consolidated financial
statements for 2001 and 2002 reflect these operations as discontinued
operations.

In 2003, the Company sold all of its remaining Latin America operations.
The consolidated financial statements present these remaining Latin America
operations as discontinued operations in accordance with SFAS No. 144.

In November 2003, the Company sold a component of its Other Operations
business segment that provides district cooling services in the Houston central
business district and related complementary energy services to district cooling
customers and others. The consolidated financial statements present these
operations as discontinued operations in accordance with SFAS No. 144.

The Company's reportable business segments include the following: Electric
Transmission & Distribution, Electric Generation, Natural Gas Distribution,
Pipelines and Gathering and Other Operations. Effective with the deregulation of
the Texas electric industry beginning January 1, 2002, the basis of business
segment reporting changed for the Company's electric operations. The Texas
generation operations of CenterPoint Energy's former integrated electric utility
(Texas Genco) became a separate reportable business segment, Electric
Generation, whereas they previously had been part of the Electric Operations
business segment. The remaining transmission and distribution function
(CenterPoint Houston) is reported separately in the Electric Transmission &
Distribution business segment. Natural Gas Distribution consists of intrastate
natural gas sales to, and natural gas transportation and distribution for,
residential, commercial, industrial and institutional customers and non-rate
regulated retail gas marketing operations to commercial and industrial
customers. Pipelines and Gathering includes the interstate natural gas pipeline
operations and the natural gas gathering and pipeline services businesses. Other
Operations consists primarily of other corporate operations which support all of
the Company's business operations.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) RECLASSIFICATIONS AND USE OF ESTIMATES

In addition to the items discussed in Note 3, some amounts from the
previous years have been reclassified to conform to the 2003 presentation of
financial statements. These reclassifications do not affect net income.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(b) PRINCIPLES OF CONSOLIDATION

The accounts of CenterPoint Energy and its wholly owned and majority owned
subsidiaries are included in the consolidated financial statements. All
significant intercompany transactions and balances are eliminated in
consolidation. The Company uses the equity method of accounting for investments
in entities in which the Company has an ownership interest between 20% and 50%
and exercises significant influence. Other investments, excluding marketable
securities, are generally carried at cost.

(c) REVENUES

The Company records revenue for electricity and natural gas sales and
services to retail customers under the accrual method and these revenues are
generally recognized upon delivery. Natural gas sales and services

76

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

not billed by month-end are accrued based upon estimated purchased gas volumes,
estimated lost and unaccounted for gas and currently effective tariff rates. The
Pipelines and Gathering business segment records revenues as transportation
services are provided. Energy sales and services not billed by month-end are
accrued based upon estimated energy and services delivered. The Electric
Generation business segment has two primary components of revenue: (1) capacity
payments, which entitles the owner to power, and (2) energy payments, which are
intended to cover the costs of fuel for the actual electricity produced.
Capacity payments are billed and collected one month prior to actual energy
deliveries and are recorded as deferred revenue until the month of actual energy
delivery. Upon delivery, both capacity and energy payment revenues are
recognized.

(d) LONG-LIVED ASSETS AND INTANGIBLES

The Company records property, plant and equipment at historical cost. The
Company expenses repair and maintenance costs as incurred. Property, plant and
equipment includes the following:

For further information regarding removal costs previously recorded as a
component of accumulated depreciation, see Note 2(n).

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), which provides
that goodwill and certain intangibles with indefinite lives will not be
amortized into results of operations, but instead will be reviewed periodically
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles with
indefinite lives is more than its fair value. On January 1, 2002, the Company
adopted the provisions of the statement that apply to goodwill and intangible
assets acquired prior to June 30, 2001.

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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

With the adoption of SFAS No. 142, the Company ceased amortization of
goodwill as of January 1, 2002. A reconciliation of previously reported net
income and earnings per share to the amounts adjusted for the exclusion of
goodwill amortization follows (in millions, except per share amounts):

The Company recognizes specifically identifiable intangibles, including
land use rights and permits, when specific rights and contracts are acquired.
The Company has no intangible assets with indefinite lives recorded as of
December 31, 2003. The Company amortizes other acquired intangibles on a
straight-line basis over the lesser of their contractual or estimated useful
lives that range from 40 to 75 years for land rights and 4 to 25 years for other
intangibles.

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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Amortization expense for other intangibles for 2001, 2002 and 2003 was $1
million, $2 million and $4 million, respectively. Estimated amortization expense
for the five succeeding fiscal years is as follows (in millions):

The Company completed its review during the second quarter of 2003 pursuant
to SFAS No. 142 for its reporting units in the Natural Gas Distribution,
Pipelines and Gathering and Other Operations business segments. No impairment
was indicated as a result of this assessment.

The Company periodically evaluates long-lived assets, including property,
plant and equipment, goodwill and specifically identifiable intangibles, when
events or changes in circumstances indicate that the carrying value of these
assets may not be recoverable. The determination of whether an impairment has
occurred is based on an estimate of undiscounted cash flows attributable to the
assets, as compared to the carrying value of the assets. An impairment analysis
of generating facilities requires estimates of possible future market prices,
load growth, competition and many other factors over the lives of the
facilities. A resulting impairment loss is highly dependent on these underlying
assumptions.

The Company has engaged a financial advisor to assist in exploring
alternatives for monetizing its 81% interest in Texas Genco, including possible
sale of its ownership interest in Texas Genco. As a result of the Company's
intention to monetize its interest in Texas Genco, the Company performed an
impairment analysis of Texas Genco's assets as of December 31, 2003 in
accordance with the provisions of SFAS No. 144. As of December 31, 2003 no
impairment had been indicated. The fair value of Texas Genco's assets could be
materially affected by a change in the estimated future cash flows for these
assets. Future cash flows for Texas Genco are estimated using a
probability-weighted approach based on the fair value of its common stock,
operating projections and estimates of how long these assets will be retained.
Changes in any of these assumptions could result in an impairment charge.

(e) REGULATORY ASSETS AND LIABILITIES

The Company applies the accounting policies established in SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71) to the
accounts of the Electric Transmission & Distribution business segment and the
utility operations of the Natural Gas Distribution business segment and to some
of the accounts of the Pipelines and Gathering business segment.

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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a list of regulatory assets/liabilities reflected on the
Company's Consolidated Balance Sheets as of December 31, 2002 and 2003:

If events were to occur that would make the recovery of these assets and
liabilities no longer probable, the Company would be required to write off or
write down these regulatory assets and liabilities. In addition, the Company
would be required to determine any impairment of the carrying costs of plant and
inventory assets. Because estimates of the fair value of Texas Genco are
required, the financial impacts of the Texas electric restructuring law with
respect to the final determination of stranded costs are subject to material
changes. Factors affecting such changes may include estimation risk, uncertainty
of future energy and commodity prices and the economic lives of the plants. See
Note 4 for additional discussion of regulatory assets.

(f) DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation is computed using the straight-line method based on economic
lives or a regulatory-mandated recovery period. Other amortization expense
includes amortization of regulatory assets and other intangibles. See Notes 2(e)
and 4(a) for additional discussion of these items.

The following table presents depreciation, goodwill amortization and other
amortization expense for 2001, 2002 and 2003.

(g) CAPITALIZATION OF INTEREST AND ALLOWANCE FOR FUNDS USED DURING
CONSTRUCTION

Allowance for funds used during construction (AFUDC) represents the
approximate net composite interest cost of borrowed funds and a reasonable
return on the equity funds used for construction. Although AFUDC increases both
utility plant and earnings, it is realized in cash through depreciation
provisions included in rates for subsidiaries that apply SFAS No. 71. Interest
and AFUDC for subsidiaries that apply SFAS No. 71 are capitalized as a component
of projects under construction and will be amortized over the assets' estimated
useful lives. During 2001, 2002 and 2003, the Company capitalized interest and
AFUDC of $9 million, $12 million and $13 million, respectively.

(h) INCOME TAXES

The Company files a consolidated federal income tax return and follows a
policy of comprehensive interperiod income tax allocation. The Company uses the
liability method of accounting for deferred income taxes and measures deferred
income taxes for all significant income tax temporary differences. Investment
tax credits were deferred and are being amortized over the estimated lives of
the related property. For additional information regarding income taxes, see
Note 11.

(i) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable are net of an allowance for doubtful accounts of $24
million and $31 million at December 31, 2002 and 2003, respectively. The
provision for doubtful accounts in the Company's Statements of Consolidated
Operations for 2001, 2002 and 2003 was $59 million, $26 million and $24 million,
respectively.

In connection with CERC's November 2002 amendment and extension of its $150
million receivables facility, CERC Corp. formed a bankruptcy remote subsidiary
for the sole purpose of buying receivables created by CERC and selling those
receivables to an unrelated third party. This transaction was accounted for as a
sale of receivables under the provisions of SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
and, as a result, the related receivables are excluded from the Consolidated
Balance Sheets. Effective June 25, 2003, CERC elected to reduce the purchase
limit under the receivables facility from $150 million to $100 million. As of
December 31, 2002 and 2003, CERC had utilized $107 million and $100 million of
its receivables facility, respectively.

The bankruptcy remote subsidiary purchases receivables with cash and
subordinated notes. In July 2003, the subordinated notes owned by CERC were
pledged to a gas supplier to secure obligations incurred in connection with the
purchase of gas by CERC.

In the first quarter of 2004, CERC replaced the receivables facility with a
$250 million committed one-year receivables facility. The bankruptcy remote
subsidiary continues to buy CERC's receivables and sell them to an unrelated
third party.

(j) INVENTORY

Inventory consists principally of materials and supplies, coal and lignite
and natural gas. Inventories used in the production of electricity and in the
retail natural gas distribution operations are primarily valued at the

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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

lower of average cost or market except for coal and lignite, which are valued
under the last-in, first-out method.

In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115), the Company reports
"available-for-sale" securities at estimated fair value within other long-term
assets in the Company's Consolidated Balance Sheets and any unrealized gain or
loss, net of tax, as a separate component of shareholders' equity and
accumulated other comprehensive income. In accordance with SFAS No. 115, the
Company reports "trading" securities at estimated fair value in the Company's
Consolidated Balance Sheets, and any unrealized holding gains and losses are
recorded as other income (expense) in the Company's Statements of Consolidated
Operations.

As of December 31, 2002 and 2003, the Company held debt and equity
securities in its nuclear decommissioning trust, which is reported at its fair
value of $163 million and $189 million, respectively, in the Company's
Consolidated Balance Sheets in other long-term assets. Any unrealized losses or
gains are accounted for as a long-term asset/liability as the Company will not
benefit from any gains, and losses will be recovered through the rate-making
process.

As of December 31, 2002 and 2003, the Company held an investment in Time
Warner Inc. common stock, which was classified as a "trading" security. For
information regarding this investment, see Note 7.

(l) ENVIRONMENTAL COSTS

The Company expenses or capitalizes environmental expenditures, as
appropriate, depending on their future economic benefit. The Company expenses
amounts that relate to an existing condition caused by past operations, and that
do not have future economic benefit. The Company records undiscounted
liabilities related to these future costs when environmental assessments and/or
remediation activities are probable and the costs can be reasonably estimated.

(m) STATEMENTS OF CONSOLIDATED CASH FLOWS

For purposes of reporting cash flows, the Company considers cash
equivalents to be short-term, highly liquid investments with maturities of three
months or less from the date of purchase. In connection with the issuance of
transition bonds in October 2001, the Company was required to establish
restricted cash accounts to collateralize the bonds that were issued in this
financing transaction. These restricted cash accounts are not available for
withdrawal until the maturity of the bonds. Cash and Cash Equivalents does not
include restricted cash. For additional information regarding the securitization
financing, see Note 4(a).

recognized as a liability is incurred and capitalized as part of the cost of the
related tangible long-lived assets. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Retirement obligations associated with
long-lived assets included within the scope of SFAS No. 143 are those for which
a legal obligation exists under enacted laws, statutes and written or oral
contracts, including obligations arising under the doctrine of promissory
estoppel.

The Company has identified retirement obligations for nuclear
decommissioning at the South Texas Project Electric Generating Station (South
Texas Project) and for lignite mine operations which supply the Limestone
electric generation facility. Prior to adoption of SFAS No. 143, the Company had
recorded liabilities for nuclear decommissioning and the reclamation of the
lignite mine. Liabilities were recorded for estimated decommissioning
obligations of $140 million and $40 million for reclamation of the lignite mine
at December 31, 2002. Upon adoption of SFAS No. 143 on January 1, 2003, the
Company reversed the $140 million previously accrued for the nuclear
decommissioning of the South Texas Project and recorded a plant asset of $99
million offset by accumulated depreciation of $36 million as well as a
retirement obligation of $187 million. The $16 million difference between
amounts previously recorded and the amounts recorded upon adoption of SFAS No.
143 is being deferred as a liability due to regulatory requirements. The Company
also reversed the $40 million it had previously recorded for the lignite mine
reclamation and recorded a plant asset of $1 million as well as a retirement
obligation of $4 million. The $37 million difference between amounts previously
recorded and the amounts recorded upon adoption of SFAS No. 143 was recorded as
a cumulative effect of accounting change. The Company has also identified other
asset retirement obligations that cannot be estimated because the assets
associated with the retirement obligations have an indeterminate life.

The following represents the balances of the asset retirement obligation as
of January 1, 2003 and the additions and accretion of the asset retirement
obligation for the year ended December 31, 2003:

The Company's rate-regulated businesses recognize removal costs as a
component of depreciation expense in accordance with regulatory treatment. As of
December 31, 2002 and 2003, these removal costs of $635 million and $647
million, respectively, have been reclassified from accumulated depreciation to
other long-term liabilities and regulatory liabilities, respectively, in the
Consolidated Balance Sheets. The Company's non-rate regulated businesses have
previously recognized removal costs as a component of depreciation expense. As
of December 31, 2002, these removal costs of $115 million have been reclassified
from accumulated depreciation to other long-term liabilities in the Consolidated
Balance Sheets. The Company reversed $115 million during the three months ended
March 31, 2003 of previously recognized removal costs with respect to these
non-rate regulated businesses as a cumulative effect of accounting change. The
total cumulative effect of accounting change from adoption of SFAS No. 143 was
$152 million. Excluded from the $80 million after-tax cumulative effect of
accounting change recorded for the three months ended March 31, 2003, is
minority interest of $19 million related to the Texas Genco stock not owned by
CenterPoint Energy.

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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following represents the pro-forma effect on the Company's net income
for the year ended December 31, 2002, as if the Company had adopted SFAS No. 143
as of January 1, 2002 (in millions, except per share amounts):

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS No. 145). SFAS No. 145
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent. SFAS No. 145 also requires that capital
leases that are modified so that the resulting lease agreement is classified as
an operating lease be accounted for as a sale-leaseback transaction. The changes
related to debt extinguishment are effective for fiscal years beginning after
May 15, 2002, and the changes related to lease accounting are effective for
transactions occurring after May 15, 2002. The Company has applied this guidance
as it relates to lease accounting and the accounting provision related to debt
extinguishment. Upon adoption of SFAS No. 145, any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods is required to be reclassified. The Company has reclassified the $26
million loss on debt extinguishment related to the fourth quarter of 2002 from
an extraordinary item to interest expense.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149 has
added additional criteria, which were effective on July 1, 2003, for new,
acquired, or newly modified forward contracts. The Company engages in forward
contracts for the sale of power. The majority of these forward contracts are
entered into either through state-mandated Public Utility Commission of Texas
(Texas Utility Commission) auctions or auctions mandated by an agreement with
Reliant Resources. All of the Company's contracts resulting from these auctions
specify the product types, the plant or group of plants from which the auctioned
products are derived,

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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the delivery location and specific delivery requirements, and pricing for each
of the products. The Company has applied the criteria from current accounting
literature, including SFAS No. 133 Implementation Issue No. C-15 -- "Scope
Exceptions: Normal Purchases and Normal Sales Exception for Option-Type
Contracts and Forward Contracts in Electricity", to both the state-mandated and
the contractually-mandated auction contracts and believes they meet the
definition of capacity contracts. Accordingly, the Company considers these
contracts normal sales contracts rather than derivatives. The Company has
evaluated its forward commodity contracts under the new requirements of SFAS No.
149. The adoption of SFAS No. 149 did not change previous accounting conclusions
relating to forward power sales contracts entered into in connection with the
state-mandated or contractually-mandated auctions, and did not have a material
effect on the Company's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS
No. 150). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Effective July 1, 2003,
upon the adoption of SFAS No. 150, the Company reclassified $725 million of
trust preferred securities as long-term debt and began to recognize the
dividends paid on the trust preferred securities as interest expense. Prior to
July 1, 2003, the dividends were classified as "Distribution on Trust Preferred
Securities" in the Statements of Consolidated Operations. Additionally, $19
million of debt issuance costs previously netted against the balance of the
trust preferred securities was reclassified to unamortized debt issuance costs.
SFAS No. 150 does not permit restatement of prior periods. The adoption of SFAS
No. 150 did not impact the Company's income from continuing operations, net
income or earnings per share. See discussion of FIN 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51" (FIN 46) below regarding the accounting for the trust preferred
securities at December 31, 2003.

In January 2003, the FASB issued FIN 46. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003, subject to the following
additional releases by the FASB. On October 9, 2003, the FASB deferred the
application for FIN 46 until the end of the first interim period or annual
period ending after December 15, 2003 if the variable interest was created
before February 1, 2003 and a public entity had not issued financial statements
reporting the variable interest entity in accordance with FIN 46. On December
24, 2003, the FASB issued a revision to FIN 46 (FIN 46-R). The effective dates
and impact of FIN 46 and FIN 46R are as follows: (a) for special-purpose
entities (SPE's) created before February 1, 2003, the Company must apply the
provisions of FIN 46 or FIN 46-R at the end of the first interim or annual
reporting period ending after December 15, 2003, (b) for variable interest
entities created before February 1, 2003 which do not meet the definition of an
SPE provided by FIN 46-R, the Company is required to adopt FIN 46-R at the end
of the first interim or annual period ending after March 15, 2004 and (c) for
all entities, regardless of whether an SPE, that were created subsequent to
December 31, 2003, the Company is required to apply the provisions of FIN 46-R
immediately. The Company has subsidiary trusts that have Mandatorily Redeemable
Preferred Securities outstanding with a liquidation value of $725 million as of
December 31, 2003. These securities were issued in 1996 and 1997 and were
previously reported on the Company's Consolidated Balance Sheet as Company
Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
Holding Solely Junior Subordinated Debentures of the Company (see disclosure
above on SFAS No. 150). The trusts were determined to be SPE's, and therefore,
the provisions of FIN 46 or FIN 46-R were applicable to the trusts for the
December 31, 2003 financial statements. The trusts were determined to be
variable interest entities under FIN 46-R. The Company also determined that it
is not the primary beneficiary of the trusts. Therefore, the trusts and the
mandatorily

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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

redeemable preferred securities issued by the trusts are no longer reported on
the Company's Consolidated Balance Sheet as of December 31, 2003. Instead, the
Company reports its junior subordinated debentures due to the trusts as
long-term debt. See Note 9. The Company has made this reclassification as of
December 31, 2003 and has elected not to restate prior period information. The
Company is currently evaluating the impact of adopting FIN 46-R applicable to
non-SPE's created prior to February 1, 2003 but does not expect a material
impact.

On December 23, 2003, the FASB issued SFAS No. 132 (Revised 2003),
"Employer's Disclosures about Pensions and Other Postretirement Benefits" (SFAS
No. 132(R)) which increases the existing disclosure requirements by requiring
more details about pension plan assets, benefit obligations, cash flows, benefit
costs and related information. Companies will be required to segregate plan
assets by category, such as debt, equity and real estate, and to provide certain
expected rates of return and other informational disclosures. SFAS No. 132(R)
also requires companies to disclose various elements of pension and
postretirement benefit costs in interim-period financial statements for quarters
beginning after December 15, 2003. The Company has adopted the disclosure
requirements of SFAS No. 132(R) in Note 10 to these consolidated financial
statements.

In December 2003, Congress passed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) which will become effective
in 2006. The Act contains incentives for the Company, if it continues to provide
prescription drug benefits for its retirees, through the provision of a
non-taxable reimbursement to the Company of specified costs. The Company has
many different alternatives available under the Act, and, until clarifying
regulations are issued with respect to the Act, the Company is unable to
determine the financial impact. On January 12, 2004, the FASB issued FASB Staff
Position (FSP) FAS 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FAS
106-1)." In accordance with FSP FAS 106-1, the Company's postretirement benefits
obligations and net periodic postretirement benefit cost in the financial
statements and accompanying notes do not reflect the effects of the legislation.
Specific authoritative guidance on the accounting for the legislation is pending
and that guidance, when issued, may require the Company to change previously
reported information.

(3) DISCONTINUED OPERATIONS

Reliant Resources. On September 30, 2002, CenterPoint Energy distributed
to its shareholders its 83% ownership interest in Reliant Resources by means of
a tax-free spin-off in the form of a dividend. Holders of CenterPoint Energy
common stock on the record date received 0.788603 shares of Reliant Resources
common stock for each share of CenterPoint Energy stock that they owned on the
record date. The Reliant Resources Distribution was recorded in the third
quarter of 2002.

As a result of the Reliant Resources Distribution, CenterPoint Energy
recorded a non-cash loss on disposal of discontinued operations of $4.4 billion
in 2002. This loss represents the excess of the carrying value of CenterPoint
Energy's net investment in Reliant Resources over the market value of Reliant
Resources' common stock. CenterPoint Energy's financial statements reflect the
reclassifications necessary to present Reliant Resources as discontinued
operations for all periods shown.

Reliant Resources' revenues included in discontinued operations for the
year ended December 31, 2001 and nine months ended September 30, 2002 were $6.5
billion and $9.5 billion, respectively, as reported in Reliant Resources' Annual
Report on Form 10-K/A, Amendment No. 1, filed with the Securities and Exchange
Commission (SEC) on May 1, 2003. These amounts have been restated to reflect
Reliant Resources' adoption of Emerging Issues Task Force (EITF) Issue No. 02-3,
"Issues Related to Accounting for Contracts Involved in Energy Trading and Risk
Management Activities." Income from these discontinued operations for the year
ended December 31, 2001 and nine months ended September 30, 2002 is reported net
of income tax expense of $274 million and $284 million, respectively.

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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Latin America. In February 2003, the Company sold its interest in Argener,
a cogeneration facility in Argentina, for $23 million. The carrying value of
this investment was approximately $11 million as of December 31, 2002. The
Company recorded an after-tax gain of $7 million from the sale of Argener in the
first quarter of 2003. In April 2003, the Company sold its final remaining
investment in Argentina, a 90 percent interest in Empresa Distribuidora de
Electricidad de Santiago del Estero S.A. The Company recorded an after-tax loss
of $3 million in the second quarter of 2003 related to its Latin America
operations. The consolidated financial statements present these Latin America
operations as discontinued operations in accordance with SFAS No. 144.
Accordingly, the consolidated financial statements include the necessary
reclassifications to reflect these operations as discontinued operations for
each of the three years in the period ended December 31, 2003.

Revenues related to the Company's Latin America operations included in
discontinued operations for the years ended December 31, 2001, 2002 and 2003
were $92 million, $15 million and $2 million, respectively. Income from these
discontinued operations for the year ended December 31, 2001 is reported net of
income tax benefit of $28 million. Income from these discontinued operations for
each of the years ended December 31, 2002 and 2003 is reported net of income tax
expense of $2 million.

Summarized balance sheet information related to discontinued operations of
Latin America is as follows as of December 31, 2002:

CenterPoint Energy Management Services, Inc. As discussed in Note 1, in
November 2003, the Company completed the sale of a component of its Other
Operations business segment, CenterPoint Energy Management Services, Inc.
(CEMS), that provides district cooling services in the Houston central business
district and related complementary energy services to district cooling customers
and others. The Company recorded an after-tax loss of $1 million from the sale
of CEMS in the fourth quarter of 2003. The Company recorded an after-tax loss in
discontinued operations of $16 million ($25 million pre-tax) during the second
quarter of 2003 to record the impairment of the long-lived asset based on the
impending sale and to record one-time employee termination benefits. The
consolidated financial statements present these CEMS operations as discontinued
operations in accordance with SFAS No. 144. Accordingly, the consolidated
financial statements include the necessary reclassifications to reflect these
operations as discontinued operations for each of the three years in the period
ended December 31, 2003.

Revenues related to CEMS included in discontinued operations for the years
ended December 31, 2001, 2002 and 2003 were $5 million, $9 million and $10
million, respectively. Income from these discontinued operations for the years
ended December 31, 2001, 2002 and 2003 is reported net of income tax benefit of
$2 million, $1 million and $2 million, respectively.

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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summarized balance sheet information related to discontinued operations of
CEMS is as follows as of December 31, 2002:

The Texas Electric Restructuring Law. In June 1999, the Texas legislature
adopted the Texas Electric Choice Plan (the Texas electric restructuring law),
which substantially amended the regulatory structure governing electric
utilities in order to allow and encourage retail competition which began in
January 2002. The Texas electric restructuring law required the separation of
the generation, transmission and distribution, and retail sales functions of
electric utilities into three different units. Under the law, neither the
generation function nor the retail function is subject to traditional cost of
service regulation, and the generation and the retail function are each operated
on a competitive basis.

The transmission and distribution function that CenterPoint Houston
performs remains subject to traditional utility rate regulation. CenterPoint
Houston recovers the cost of its service through an energy delivery charge
approved by the Texas Utility Commission. As a result of these changes, there
are no meaningful comparisons for the Electric Transmission & Distribution and
Electric Generation business segments prior to 2002 when retail sales became
fully competitive.

Under the Texas electric restructuring law, transmission and distribution
utilities in Texas, such as CenterPoint Houston, whose generation assets were
"unbundled" may recover, following a regulatory proceeding to be held in 2004
(2004 True-Up Proceeding) as further discussed below in "-- 2004 True-Up
Proceeding":

- "stranded costs," which consist of the positive excess of the regulatory
net book value of generation assets, as defined, over the market value of
the assets, taking specified factors into account;

- the difference between the Texas Utility Commission's projected market
prices for generation during 2002 and 2003 and the actual market prices
for generation as determined in the state-mandated capacity auctions
during that period;

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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- the Texas jurisdictional amount reported by the previously vertically
integrated electric utilities as generation-related regulatory assets and
liabilities (offset and adjusted by specified amounts) in their audited
financial statements for 1998;

- final fuel over- or under-recovery; less

- "price to beat" clawback components.

The Texas electric restructuring law permits transmission and distribution
utilities to recover the true-up components through transition charges on retail
electric customers' bills, to the extent that such components are established in
certain regulatory proceedings. These transition charges are non-bypassable,
meaning that they must be paid by essentially all customers and cannot, except
in limited circumstances, be avoided by switching to self-generation. The law
also authorizes the Texas Utility Commission to permit those utilities to issue
transition bonds based on the securitization of revenues associated with the
transition charges. CenterPoint Houston recovered a portion of its regulatory
assets in 2001 through the issuance of transition bonds. For a further
discussion of these matters, see "-- Securitization" below.

The Texas electric restructuring law also provides specific regulatory
remedies to reduce or mitigate a utility's stranded cost exposure. During a base
rate freeze period from 1999 through 2001, earnings above the utility's
authorized rate of return formula were required to be applied in a manner to
accelerate depreciation of generation-related plant assets for regulatory
purposes if the utility was expected to have stranded costs. In addition,
depreciation expense for transmission and distribution-related assets could be
redirected to generation assets for regulatory purposes during that period if
the utility was expected to have stranded costs. CenterPoint Houston undertook
both of these remedies provided in the Texas electric restructuring law, but in
a rate order issued in October 2001, the Texas Utility Commission required
CenterPoint Houston to reverse those actions. For a further discussion of these
matters, see "-- Mitigation" below.

2004 True-Up Proceeding. In 2004, the Texas Utility Commission will
conduct true-up proceedings for investor-owned utilities. The purpose of the
true-up proceeding is to quantify and reconcile the amount of the true-up
components. The true-up proceeding will result in either additional charges
being assessed on, or credits being issued to, retail electric customers.
CenterPoint Houston expects to make the filing to initiate its final true-up
proceeding on March 31, 2004. The Texas electric restructuring law requires a
final order to be issued by the Texas Utility Commission not more than 150 days
after a proper filing is made by the regulated utility, although under its rules
the Texas Utility Commission can extend the 150-day deadline for good cause. Any
delay in the final order date will result in a delay in the securitization of
CenterPoint Houston's true-up components and the implementation of the
non-bypassable charges described above, and could delay the recovery of carrying
costs on the true-up components determined by the Texas Utility Commission.

CenterPoint Houston will be required to establish and support the amounts
it seeks to recover in the 2004 True-Up Proceeding. CenterPoint Houston expects
these amounts to be substantial. Third parties will have the opportunity and are
expected to challenge CenterPoint Houston's calculation of these amounts. To the
extent recovery of a portion of these amounts is denied or if CenterPoint
Houston agrees to forego recovery of a portion of the request under a settlement
agreement, CenterPoint Houston would be unable to recover those amounts in the
future.

Following adoption of the true-up rule by the Texas Utility Commission in
2001, CenterPoint Houston appealed the provisions of the rule that permitted
interest to be recovered on stranded costs only from the date of the Texas
Utility Commission's final order in the 2004 True-Up Proceeding, instead of from
January 1, 2002 as CenterPoint Houston contends is required by law. On January
30, 2004, the Texas Supreme Court granted CenterPoint Houston's petition for
review of the true-up rule. Oral arguments were heard on February 18, 2004. The
decision by the Court is pending. The Company has not accrued interest income on
stranded costs in its consolidated financial statements, but estimates such
interest income would be material to the Company's consolidated financial
statements.

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Stranded Cost Component. CenterPoint Houston will be entitled to recover
stranded costs through a transition charge to its customers if the regulatory
net book value of generating plant assets exceeds the market value of those
assets. The regulatory net book value of generating plant assets is the balance
as of December 31, 2001 plus certain costs incurred for reductions in emissions
of oxides of nitrogen (NOx), any above-market purchased power contracts and
certain other amounts. The market value will be equal to the average daily
closing price on The New York Stock Exchange for publicly held shares of Texas
Genco common stock for 30 consecutive trading days chosen by the Texas Utility
Commission out of the last 120 trading days immediately preceding the true-up
filing, plus a control premium, up to a maximum of 10%, to the extent included
in the valuation determination made by the Texas Utility Commission. If Texas
Genco is sold to a third party at a lower price than the market value used by
the Texas Utility Commission, CenterPoint Houston would be unable to recover the
difference.

ECOM True-Up Component. The Texas Utility Commission used a computer model
or projection, called an excess cost over market (ECOM) model, to estimate
stranded costs related to generation plant assets. Accordingly, the Texas
Utility Commission estimated the market power prices that would be received in
the generation capacity auctions mandated by the Texas electric restructuring
law during 2002 and 2003. Any difference between the Texas Utility Commission's
projected market prices for generation during 2002 and 2003 and the actual
market prices for generation as determined in the state-mandated capacity
auctions during that period will be a component of the 2004 True-Up Proceeding.
In accordance with the Texas Utility Commission's rules regarding the ECOM
True-Up, for the years ended December 31, 2002 and 2003, CenterPoint Energy
recorded approximately $697 million and $661 million, respectively, in non-cash
ECOM True-Up revenue. ECOM True-Up revenue is recorded as a regulatory asset and
totaled $1.4 billion as of December 31, 2003.

In 2003, some parties sought modifications to the true-up rules. Although
the Texas Utility Commission denied that request, the Company expects that
issues could be raised in the 2004 True-Up Proceeding regarding its compliance
with the Texas Utility Commission's rules regarding the ECOM true-up, including
whether Texas Genco has auctioned all capacity it is required to auction in view
of the fact that some capacity has failed to sell in the state-mandated
auctions. The Company believes Texas Genco has complied with the requirements
under the applicable rules, including re-offering the unsold capacity in
subsequent auctions. If events were to occur during the 2004 True-Up Proceeding
that made the recovery of the ECOM true-up regulatory asset no longer probable,
the Company would write off the unrecoverable balance of that asset as a charge
against earnings.

Fuel Over/Under Recovery Component. CenterPoint Houston and Texas Genco
filed their joint application to reconcile fuel revenues and expenses with the
Texas Utility Commission in July 2002. This final fuel reconciliation filing
covered reconcilable fuel expense and interest of approximately $8.5 billion
incurred from August 1, 1997 through January 30, 2002. In January 2003, a
settlement agreement was reached, as a result of which certain items totaling
$24 million were written off during the fourth quarter of 2002 and items
totaling $203 million were carried forward for later resolution by the Texas
Utility Commission. In late 2003, a hearing was concluded on those remaining
issues. On March 4, 2004, an Administrative Law Judge (ALJ) recommended that
CenterPoint Houston not be allowed to recover $87 million in fuel expenses
incurred during the reconciliation period. CenterPoint Houston will contest this
recommendation when the Texas Utility Commission considers the ALJ's conclusions
on April 15, 2004. However, since the recovery of this portion of the regulatory
asset is no longer probable, CenterPoint Houston reserved $117 million,
including interest, in the fourth quarter of 2003. The ALJ also recommended that
$46 million be recovered in the 2004 True-Up Proceeding rather than in the fuel
proceeding. The results of the Texas Utility Commission's decision will be a
component of the 2004 True-Up Proceeding.

"Price to Beat" Clawback Component. In connection with the implementation
of the Texas electric restructuring law, the Texas Utility Commission has set a
"price to beat" that retail electric providers affiliated or formerly affiliated
with a former integrated utility must charge residential and small commercial
customers

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within their affiliated electric utility's service area. The true-up provides
for a clawback of the "price to beat" in excess of the market price of
electricity if 40% of the "price to beat" load is not served by other retail
electric providers by January 1, 2004. Pursuant to the Texas electric
restructuring law and a master separation agreement entered into in connection
with the September 30, 2002 spin-off of the Company's interest in Reliant
Resources to the Company's shareholders, Reliant Resources is obligated to pay
CenterPoint Houston the clawback component of the true-up. Based on an order
issued on February 13, 2004 by the Texas Utility Commission, the clawback will
equal $150 times the number of residential customers served by Reliant Resources
in CenterPoint Houston's service territory, less the number of residential
customers served by Reliant Resources outside CenterPoint Houston's service
territory, on January 1, 2004. As reported in Reliant Resources' Annual Report
on Form 10-K for the year ended December 31, 2003, Reliant Resources expects
that the clawback payment will be $175 million. The clawback will reduce the
amount of recoverable costs to be determined in the 2004 True-Up Proceeding.

Securitization. The Texas electric restructuring law provides for the use
of special purpose entities to issue transition bonds for the economic value of
generation-related regulatory assets and stranded costs. These transition bonds
will be amortized over a period not to exceed 15 years through non-bypassable
transition charges. In October 2001, a special purpose subsidiary of CenterPoint
Houston issued $749 million of transition bonds to securitize certain
generation-related regulatory assets. These transition bonds have a final
maturity date of September 15, 2015 and are non-recourse to the Company and its
subsidiaries other than to the special purpose issuer. Payments on the
transition bonds are made out of funds from non-bypassable transition charges.

The Company expects that upon completion of the 2004 True-Up Proceeding,
CenterPoint Houston will seek to securitize the amounts established for the
true-up components. Before CenterPoint Houston can securitize these amounts, the
Texas Utility Commission must conduct a proceeding and issue a financing order
authorizing CenterPoint Houston to do so. Under the Texas electric restructuring
law, CenterPoint Houston is entitled to recover any portion of the true-up
balance not securitized by transition bonds through a non-bypassable competition
transition charge.

Mitigation. In an order issued in October 2001, the Texas Utility
Commission established the transmission and distribution rates that became
effective in January 2002. The Texas Utility Commission determined that
CenterPoint Houston had over-mitigated its stranded costs by redirecting
transmission and distribution depreciation and by accelerating depreciation of
generation assets as provided under its transition plan and the Texas electric
restructuring law. In this final order, CenterPoint Houston was required to
reverse the amount of redirected depreciation ($841 million) and accelerated
depreciation ($1.1 billion) taken for regulatory purposes as allowed under the
transition plan and the Texas electric restructuring law. In accordance with the
order, CenterPoint Houston recorded a regulatory liability of $1.1 billion to
reflect the prospective refund of the accelerated depreciation, and in January
2002 CenterPoint Houston began refunding excess mitigation credits, which are to
be refunded over a seven-year period. The annual refund of excess mitigation
credits is approximately $238 million. As of December 31, 2002 and 2003, the
Company had recorded net electric plant mitigation regulatory assets of $1.1
billion and $1.3 billion, respectively, based on the Company's expectation that
these amounts will be recovered in the 2004 True-Up Proceeding as stranded
costs. In the event that the excess mitigation credits prove to have been
unnecessary and CenterPoint Houston is determined to have stranded costs, the
excess mitigation credits will be included in the stranded costs to be
recovered. In June 2003, CenterPoint Houston sought authority from the Texas
Utility Commission to terminate these credits based on then current estimates of
what that final determination would be. The Texas Utility Commission denied the
request in January 2004.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(b) RATE CASES

In August 2002, a settlement was approved by the Arkansas Public Service
Commission (APSC) that resulted in an increase in the base rate and service
charge revenues of CenterPoint Energy Arkla (Arkla) of approximately $27 million
annually. In addition, the APSC approved a gas main replacement surcharge that
provided $2 million of additional revenue in 2003 and is expected to provide
additional amounts in subsequent years.

In December 2002, a settlement was approved by the Oklahoma Corporation
Commission that resulted in an increase in the base rate and service charge
revenues of Arkla of approximately $6 million annually.

In November 2003, Arkla filed a request with the Louisiana Public Service
Commission (LPSC) for a $16 million increase to its base rate and service charge
revenues in Louisiana. The case is expected to be resolved in mid-2004.

In December 2003, a settlement was approved by the City of Houston that
will result in an increase in the base rate and service charge revenues of
CenterPoint Energy Entex (Entex) of approximately $7 million annually. Entex has
submitted these settlement rates to the 28 other cities within its Houston
Division and the Railroad Commission of Texas for consideration and approval. If
all regulatory approvals are received from these 29 jurisdictions, Entex's base
rate and service charge revenues are expected to increase by approximately $7
million annually in addition to the $7 million increase discussed above.

On February 10, 2004, a settlement was approved by the LPSC that is
expected to result in an increase in Entex's base rate and service charge
revenues of approximately $2 million annually.

(c) NUCLEAR DECOMMISSIONING TRUST

Texas Genco is the beneficiary of decommissioning trusts that have been
established to provide funding for decontamination and decommissioning of a
nuclear electric generation station in which Texas Genco owns a 30.8% interest
(see Notes 6 and 12(e)). CenterPoint Houston collects through rates or other
authorized charges to its electric utility customers amounts designated for
funding the decommissioning trusts, and deposits these amounts into the
decommissioning trusts. Upon decommissioning of the facility, in the event funds
from the trusts are inadequate, CenterPoint Houston or its successor will be
required to collect through rates or other authorized charges to customers as
contemplated by the Texas Utilities Code all additional amounts required to fund
Texas Genco's obligations relating to the decommissioning of the facility.
Following the completion of the decommissioning, if surplus funds remain in the
decommissioning trust, the excess will be refunded to the ratepayers of
CenterPoint Houston or its successor.

(d) OTHER REGULATORY PROCEEDINGS

City of Tyler, Texas Dispute. In July 2002, the City of Tyler, Texas,
asserted that Entex had overcharged residential and small commercial customers
in that city for excessive gas costs under supply agreements in effect since
1992. That dispute has been referred to the Texas Railroad Commission by
agreement of the parties for a determination of whether Entex has properly and
lawfully charged and collected for gas service to its residential and commercial
customers in its Tyler distribution system for the period beginning November 1,
1992, and ending October 31, 2002. The Company believes that all costs for
Entex's Tyler distribution system have been properly included and recovered from
customers pursuant to Entex's filed tariffs.

FERC Contract Inquiry. On September 15, 2003, the FERC issued a Show Cause
Order to CenterPoint Energy Gas Transmission Company (CEGT), one of CERC's
natural gas pipeline subsidiaries. In its Show Cause Order, the FERC contends
that CEGT has failed to file with the FERC and post on the internet certain
information relating to negotiated rate contracts that CEGT had entered into
pursuant to 1996

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FERC orders. Those orders authorized CEGT to enter into negotiated rate
contracts that deviate from the rates prescribed under its filed FERC tariffs.
The FERC also alleges that certain of the contracts contain provisions that CEGT
was not authorized to negotiate under the terms of the 1996 orders.

Following issuance of the Show Cause Order, CEGT made certain compliance
filings, met with members of the FERC's staff and provided additional
information relating to the FERC's Show Cause Order. On March 4, 2004, the FERC
issued orders accepting CEGT's compliance filings and approving a Stipulation
and Consent Agreement with CEGT that resolved the issues raised by the Show
Cause Order. The resolution of these issues did not have a material impact on
our results of operations, financial condition and cash flows.

(5) DERIVATIVE INSTRUMENTS

Effective January 1, 2001, the Company adopted SFAS No. 133, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement requires that derivatives be recognized at
fair value in the balance sheet and that changes in fair value be recognized
either currently in earnings or deferred as a component of other comprehensive
income, depending on the intended use of the derivative instrument as hedging
(a) the exposure to changes in the fair value of an asset or liability (Fair
Value Hedge) or (b) the exposure to variability in expected future cash flows
(Cash Flow Hedge) or (c) the foreign currency exposure of a net investment in a
foreign operation. For a derivative not designated as a hedging instrument, the
gain or loss is recognized in earnings in the period it occurs.

Adoption of SFAS No. 133 on January 1, 2001 resulted in an after-tax
increase in net income of $59 million and a cumulative after-tax increase in
accumulated other comprehensive income of $38 million.

The Company is exposed to various market risks. These risks arise from
transactions entered into in the normal course of business. The Company utilizes
derivative financial instruments such as physical forward contracts, swaps and
options (Energy Derivatives) to mitigate the impact of changes and cash flows of
its natural gas businesses on its operating results and cash flows.

(a) NON-TRADING ACTIVITIES

Cash Flow Hedges. To reduce the risk from market fluctuations associated
with purchased gas costs, the Company enters into energy derivatives in order to
hedge certain expected purchases and sales of natural gas (non-trading energy
derivatives). The Company applies hedge accounting for its non-trading energy
derivatives utilized in non-trading activities only if there is a high
correlation between price movements in the derivative and the item designated as
being hedged. The Company analyzes its physical transaction portfolio to
determine its net exposure by delivery location and delivery period. Because the
Company's physical transactions with similar delivery locations and periods are
highly correlated and share similar risk exposures, the Company facilitates
hedging for customers by aggregating physical transactions and subsequently
entering into non-trading energy derivatives to mitigate exposures created by
the physical positions.

During 2003, no hedge ineffectiveness was recognized in earnings from
derivatives that are designated and qualify as Cash Flow Hedges. No component of
the derivative instruments' gain or loss was excluded from the assessment of
effectiveness. If it becomes probable that an anticipated transaction will not
occur, the Company realizes in net income the deferred gains and losses
recognized in accumulated other comprehensive loss. Once the anticipated
transaction occurs, the accumulated deferred gain or loss recognized in
accumulated other comprehensive loss is reclassified and included in the
Company's Statements of Consolidated Operations under the caption "Fuel and Cost
of Gas Sold." Cash flows resulting from these transactions in non-trading energy
derivatives are included in the Statements of Consolidated Cash Flows in the
same category as the item being hedged. As of December 31, 2003, the Company
expects $38 million in accumulated other comprehensive loss to be reclassified
into net income during the next twelve months.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The maximum length of time the Company is hedging its exposure to the
variability in future cash flows for forecasted transactions on existing
financial instruments is primarily two years with a limited amount of exposure
up to five years. The Company's policy is not to exceed five years in hedging
its exposure.

Interest Rate Swaps. As of December 31, 2003, the Company had an
outstanding interest rate swap with a notional amount of $250 million to fix the
interest rate applicable to floating rate short-term debt. This swap, which
expired in January 2004, did not qualify as a cash flow hedge under SFAS No.
133, and was marked to market in the Company's Consolidated Balance Sheets with
changes reflected in interest expense in the Statements of Consolidated
Operations.

During the year ended December 31, 2002, the Company settled its
forward-starting interest rate swaps having an aggregate notional amount of $1.5
billion at a cost of $156 million, which was recorded in other comprehensive
income and reclassified $36 million and $12 million to interest expense in 2002
and 2003, respectively. The remaining $108 million in other comprehensive income
is being amortized into interest expense in the same period during which the
interest payments are made for the designated fixed-rate debt.

Embedded Derivative. The Company's $575 million of convertible senior
notes, issued May 19, 2003 and $255 million of convertible senior notes, issued
December 17, 2003 (see Note 9), contain contingent interest provisions. The
contingent interest component is an embedded derivative as defined by SFAS No.
133, and accordingly, must be split from the host instrument and recorded at
fair value on the balance sheet. The value of the contingent interest components
was not material at issuance or at December 31, 2003.

(b) CREDIT RISKS

In addition to the risk associated with price movements, credit risk is
also inherent in the Company's non-trading derivative activities. Credit risk
relates to the risk of loss resulting from non-performance of contractual
obligations by a counterparty. The following table shows the composition of the
non-trading derivative assets of the Company as of December 31, 2002 and 2003
(in millions):

(1) "Investment grade" is primarily determined using publicly available credit
ratings along with the consideration of credit support (such as parent
company guarantees) and collateral, which encompass cash and standby letters
of credit.

(2) For unrated counterparties, the Company performs financial statement
analysis, considering contractual rights and restrictions and collateral, to
create a synthetic credit rating.

(3) The $35 million non-trading derivative asset includes an $11 million asset
due to trades with Reliant Energy Services, Inc. (Reliant Energy Services),
an affiliate until the date of the Reliant Resources Distribution. As of
December 31, 2003, Reliant Energy Services did not have an investment grade
rating.

(c) GENERAL POLICY

The Company has established a Risk Oversight Committee composed of
corporate and business segment officers that oversees all commodity price and
credit risk activities, including the Company's trading,

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marketing, risk management services and hedging activities. The committee's
duties are to establish the Company's commodity risk policies, allocate risk
capital within limits established by the Company's board of directors, approve
trading of new products and commodities, monitor risk positions and ensure
compliance with the Company's risk management policies and procedures and
trading limits established by the Company's board of directors.

The Company's policies prohibit the use of leveraged financial instruments.
A leveraged financial instrument, for this purpose, is a transaction involving a
derivative whose financial impact will be based on an amount other than the
notional amount or volume of the instrument.

(6) JOINTLY OWNED ELECTRIC UTILITY PLANT

Texas Genco owns a 30.8% interest in the South Texas Project, which
consists of two 1,250 MW nuclear generating units and bears a corresponding
30.8% share of capital and operating costs associated with the project. The
South Texas Project is owned as a tenancy in common among Texas Genco and three
other co-owners, with each owner retaining its undivided ownership interest in
the two generating units and the electrical output from those units. Texas Genco
is severally liable, but not jointly liable, for the expenses and liabilities of
the South Texas Project. Texas Genco and the three other co-owners organized the
STP Nuclear Operating company (STPNOC) to operate and maintain the South Texas
Project. STPNOC is managed by a board of directors comprised of one director
appointed by each of the four co-owners, along with the chief executive officer
of STPNOC. Texas Genco's share of direct expenses of the South Texas Project is
included in the corresponding operating expense categories in the accompanying
consolidated financial statements. As of December 31, 2002 and 2003, Texas
Genco's total utility plant for the South Texas Project was $385 million and
$431 million, respectively (net of $2.2 billion accumulated depreciation which
includes an impairment loss recorded in 1999 of $745 million). As of December
31, 2002 and 2003, Texas Genco's investment in nuclear fuel was $42 million (net
of $302 million amortization) and $40 million (net of $316 million
amortization), respectively.

(7) INDEXED DEBT SECURITIES (ZENS) AND TIME WARNER SECURITIES

(a) ORIGINAL INVESTMENT IN TIME WARNER SECURITIES

In 1995, the Company sold a cable television subsidiary to Time Warner Inc.
(TW) and received TW convertible preferred stock (TW Preferred) as partial
consideration. On July 6, 1999, the Company converted its 11 million shares of
TW Preferred into 45.8 million shares of Time Warner common stock (TW Common).
Unrealized gains and losses resulting from changes in the market value of the TW
Common are recorded in the Company's Statements of Consolidated Operations.

(b) ZENS

In September 1999, the Company issued its 2.0% Zero-Premium Exchangeable
Subordinated Notes due 2029 (ZENS) having an original principal amount of $1.0
billion. ZENS are exchangeable for cash equal to the market value of a specified
number of shares of TW common. The Company pays interest on the ZENS at an
annual rate of 2% plus the amount of any quarterly cash dividends paid in
respect of the shares of TW Common attributable to the ZENS. The principal
amount of ZENS is subject to being increased to the extent that the annual yield
from interest and cash dividends on the reference shares of TW Common is less
than 2.309%. At December 31, 2003, ZENS having an original principal amount of
$840 million and a contingent principal amount of $848 million were outstanding
and were exchangeable, at the option of the holders, for cash equal to 95% of
the market value of 21.6 million shares of TW Common deemed to be attributable
to the ZENS. At December 31, 2003, the market value of such shares was
approximately $389 million, which would provide an exchange amount of $440 for
each $1,000 original principal amount of ZENS. At maturity, the holders of the
ZENS will receive in cash the higher of the original principal amount of the
ZENS (subject to

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adjustment as discussed above) or an amount based on the then-current market
value of TW Common, or other securities distributed with respect to TW Common.

Through December 31, 2003, holders of approximately 16% of the 17.2 million
ZENS originally issued had exercised their right to exchange their ZENS for
cash, resulting in aggregate cash payments by CenterPoint Energy of
approximately $45 million.

A subsidiary of the Company owns shares of TW Common and elected to
liquidate a portion of such holdings to facilitate the Company's making the cash
payments for the ZENS exchanged in 2002. In connection with the exchanges in
2002, the Company received net proceeds of approximately $43 million from the
liquidation of approximately 4.1 million shares of TW Common at an average price
of $10.56 per share. The Company now holds 21.6 million shares of TW Common
which are classified as trading securities under SFAS No. 115 and are expected
to be held to facilitate the Company's ability to meet its obligation under the
ZENS.

Upon adoption of SFAS No. 133 effective January 1, 2001, the ZENS
obligation was bifurcated into a debt component and a derivative component (the
holder's option to receive the appreciated value of TW Common at maturity). The
derivative component was valued at fair value and determined the initial
carrying value assigned to the debt component ($121 million) as the difference
between the original principal amount of the ZENS ($1 billion) and the fair
value of the derivative component at issuance ($879 million). Effective January
1, 2001 the debt component was recorded at its accreted amount of $122 million
and the derivative component was recorded at its fair value of $788 million, as
a current liability, resulting in a transition adjustment pre-tax gain of $90
million ($59 million net of tax). The transition adjustment gain was reported in
the first quarter of 2001 as the effect of a change in accounting principle.
Subsequently, the debt component accretes through interest charges at 17.5%
annually up to the minimum amount payable upon maturity of the ZENS in 2029
(approximately $915 million) which reflects exchanges and adjustments to
maintain a 2.309% annual yield, as discussed above. Changes in the fair value of
the derivative component are recorded in the Company's Statements of
Consolidated Operations. During 2001, 2002 and 2003, the Company recorded a loss
of $70 million, a loss of $500 million and a gain of $106 million, respectively,
on the Company's investment in TW Common. During 2001, 2002 and 2003, the
Company recorded a gain of $58 million, a gain of $480 million and a loss of $96
million, respectively, associated with the fair value of the derivative
component of the ZENS obligation. Changes in the fair value of the TW Common
held by the Company are expected to substantially offset changes in the fair
value of the derivative component of the ZENS.

The Company has a Shareholder Rights Plan that states that each share of
its common stock includes one associated preference stock purchase right (Right)
which entitles the registered holder to purchase from the Company a unit
consisting of one-thousandth of a share of Series A Preference Stock. The
Rights, which expire on December 11, 2011, are exercisable upon some events
involving the acquisition of 20% or more of the Company's outstanding common
stock. Upon the occurrence of such an event, each Right entitles the holder to
receive common stock with a current market price equal to two times the exercise
price of the Right. At anytime prior to becoming exercisable, the Company may
repurchase the Rights at a price of $0.005 per Right. There are 700,000 shares
of Series A Preference Stock reserved for issuance upon exercise of the Rights.

(1) Includes amounts due or exchangeable within one year of the date noted.

(2) Upon adoption of SFAS No. 133 effective January 1, 2001, the Company's ZENS
obligation was bifurcated into a debt component and an embedded derivative
component. For additional information regarding ZENS, see Note 7(b). As ZENS
are exchangeable for cash at any time at the option of the holders, these
notes are classified as a current portion of long-term debt.

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(3) These series of debt are secured by first mortgage bonds of CenterPoint
Houston.

(4) $527 million of these series of debt is secured by general mortgage bonds of
CenterPoint Houston.

(5) Classified as long-term debt because of the termination dates of the
facilities under which the funds were borrowed.

(6) The junior subordinated debentures were issued to subsidiary trusts in
connection with the issuance by those trusts of preferred securities. The
trust preferred securities were deconsolidated effective December 31, 2003
pursuant to the adoption of FIN 46. This resulted in the junior subordinated
debentures held by the trusts being reported as long-term debt. For further
discussion, see Note 2(n).

(7) For further discussion of the securitization financing, see Note 4(a).

(8) London inter-bank offered rate (LIBOR) has a minimum rate of 3% under the
terms of this debt. This term loan is secured by general mortgage bonds of
CenterPoint Houston.

(9) Debt acquired in business acquisitions is adjusted to fair market value as
of the acquisition date. Included in long-term debt is additional
unamortized premium related to fair value adjustments of long-term debt of
$7 million and $6 million at December 31, 2002 and 2003, respectively, which
is being amortized over the respective remaining term of the related
long-term debt.

(a) SHORT-TERM BORROWINGS

Credit Facilities. As of December 31, 2003, CERC Corp. had a revolving
credit facility that provided for an aggregate of $200 million in committed
credit and Texas Genco had a revolving credit facility that provided for an
aggregate of $75 million of committed credit. As of December 31, 2003, $63
million was borrowed under the CERC Corp. revolving credit facility and there
were no borrowings under the Texas Genco facility. The CERC Corp. revolver
terminates on March 23, 2004 and the Texas Genco revolver terminates on December
21, 2004.

Rates for borrowings under CERC Corp.'s facility, including the facility
fee, are the London interbank offered rate (LIBOR) plus 250 basis points based
on current credit ratings and the applicable pricing grid. CERC Corp.'s
revolving credit facility contains various business and financial covenants.
CERC Corp. is prohibited from making loans to or other investments in the
Company. CERC Corp. is currently in compliance with the covenants under the
credit agreement. CERC Corp. is currently in discussions with banks seeking to
arrange a replacement revolving credit facility and expects to have such a
facility in place on or prior to the termination date of the existing facility.

Rates for borrowings under Texas Genco's facility, including the facility
fee, are LIBOR plus 150 basis points. Texas Genco's revolving credit facility
contains various business and financial covenants. Texas Genco is currently in
compliance with the covenants under the credit agreement.

The weighted average interest rate on short-term borrowings at December 31,
2002 and December 31, 2003 was 5.4% and 5.0%, respectively. These interest rates
exclude facility fees and other fees paid in connection with the arrangement of
the bank facilities. As of December 31, 2003, cash aggregating $65.5 million was
invested in a money market fund.

(b) LONG-TERM DEBT

On October 7, 2003, the Company entered into a three-year credit facility
composed of a revolving credit facility of $1.4 billion and a $925 million term
loan from institutional investors. The facility matures on October 7, 2006 and
requires prepayments aggregating $20 million. Borrowings under the revolver
($523 million at December 31, 2003) bear interest based on LIBOR rates under a
pricing grid tied to the Company's credit ratings. At the Company's current
ratings, the interest rate for borrowings under the revolver is LIBOR plus 300
basis points. The interest rate for borrowings under the term loan is LIBOR plus
350 basis points.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's Texas Genco stock is pledged to the lenders under the facility and
the Company has agreed to limit the dividend paid on its common stock to $0.10
per share per quarter. The facility provides that until such time as the
facility has been reduced to $750 million, 100% of the net cash proceeds from
any securitizations relating to the recovery of the true-up components, after
making any payments required under CenterPoint Houston's $1.3 billion term loan,
and the net cash proceeds of any sales of the common stock of Texas Genco owned
by the Company or of material portions of Texas Genco's assets shall be applied
to repay loans under the facility and reduce that facility. Any money raised in
other future capital markets offerings and in the sale of other significant
assets is not required to be used to pay down the facility. The facility
requires the Company not to fall below a minimum interest coverage ratio and not
to exceed a maximum leverage ratio. The facility refinanced and replaced a prior
bank facility that, as of September 30, 2003, consisted of an $856 million term
loan and a $1.5 billion revolver. In connection with entering into the new
facility, the Company paid up-front fees of approximately $16 million and
avoided a payment of $18 million which would have been due under the prior
facility on October 9, 2003. Additionally, in October 2003, the Company expensed
$21 million of unamortized loan costs associated with the prior facility.

On March 18, 2003, CenterPoint Houston issued $762 million aggregate
principal amount of general mortgage bonds composed of $450 million principal
amount of 10-year bonds with an interest rate of 5.7% and $312 million principal
amount of 30-year bonds with an interest rate of 6.95%. Proceeds were used to
redeem approximately $312 million aggregate principal amount of CenterPoint
Houston's first mortgage bonds and to repay $429 million of intercompany notes
payable to CenterPoint Energy by CenterPoint Houston. Proceeds from the note
repayment were ultimately used by CenterPoint Energy to repay $150 million
aggregate principal amount of medium-term notes maturing on April 21, 2003 and
to repay borrowings under the Company's prior facility, including $50 million of
term loan repayments.

On March 25 and April 14, 2003, CERC issued $650 million aggregate
principal amount and $112 million aggregate principal amount, respectively, of
7.875% senior notes due in 2013. A portion of the proceeds was used to refinance
$360 million aggregate principal amount of CERC's 6 3/8% Term Enhanced
ReMarketable Securities (TERM Notes) and to pay costs associated with the
refinancing. Proceeds were also used to repay approximately $340 million of bank
borrowings under CERC's $350 million revolving credit facility prior to its
expiration on March 31, 2003.

On April 9, 2003, the Company remarketed $175 million aggregate principal
amount of pollution control bonds that it had owned since the fourth quarter of
2002. Remarketed bonds maturing in 2029 have a principal amount of $75 million
and an interest rate of 8%. Remarketed bonds maturing in 2018 have a principal
amount of $100 million and an interest rate of 7.75%. Proceeds from the
remarketing were used to repay bank debt. At December 31, 2002, the $175 million
of bonds owned by the Company were not reflected as outstanding debt in the
Company's Consolidated Balance Sheets.

On May 19, 2003, the Company issued $575 million aggregate principal amount
of convertible senior notes due May 15, 2023 with an interest rate of 3.75%.
Holders may convert each of their notes into shares of CenterPoint Energy common
stock, initially at a conversion rate of 86.3558 shares of common stock per
$1,000 principal amount of notes at any time prior to maturity, under the
following circumstances: (1) if the last reported sale price of CenterPoint
Energy common stock for at least 20 trading days during the period of 30
consecutive trading days ending on the last trading day of the previous calendar
quarter is greater than or equal to 120% or, following May 15, 2008, 110% of the
conversion price per share of CenterPoint Energy common stock on such last
trading day, (2) if the notes have been called for redemption, (3) during any
period in which the credit ratings assigned to the notes by both Moody's
Investors Service, Inc. (Moody's) and Standard & Poor's Ratings Services (S&P),
a division of The McGraw-Hill Companies, are lower than Ba2 and BB,
respectively, or the notes are no longer rated by at least one of these ratings
services or their successors, or (4) upon the occurrence of specified corporate
transactions, including the distribution to all holders of CenterPoint Energy
common stock of certain rights entitling them to purchase shares of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CenterPoint Energy common stock at less than the last reported sale price of a
share of CenterPoint Energy common stock on the trading day prior to the
declaration date of the distribution or the distribution to all holders of
CenterPoint Energy common stock of the Company's assets, debt securities or
certain rights to purchase the Company's securities, which distribution has a
per share value exceeding 15% of the last reported sale price of a share of
CenterPoint Energy common stock on the trading day immediately preceding the
declaration date for such distribution. The convertible senior notes also have a
contingent interest feature requiring contingent interest to be paid to holders
of notes commencing on or after May 15, 2008, in the event that the average
trading price of a note for the applicable five trading day period equals or
exceeds 120% of the principal amount of the note as of the day immediately
preceding the first day of the applicable six-month interest period. For any
six-month period, contingent interest will be equal to 0.25% of the average
trading price of the note for the applicable five-trading-day period. Proceeds
from the issuance of the convertible senior notes were used for term loan
repayments and to repay revolver borrowings under the Company's prior facility
in the amount of $557 million and $0.75 million, respectively.

On May 23, 2003, CenterPoint Houston issued $200 million aggregate
principal amount of 20-year general mortgage bonds with an interest rate of
5.6%. Proceeds were used to redeem $200 million aggregate principal amount of
CenterPoint Houston's 7.5% first mortgage bonds due 2023 at 103.51% of their
principal amount.

On May 27, 2003, the Company issued $400 million aggregate principal amount
of senior notes composed of $200 million principal amount of 5-year notes with
an interest rate of 5.875% and $200 million principal amount of 12-year notes
with an interest rate of 6.85%. Proceeds in the amount of $397 million were used
for repayments of the term loan under the Company's prior facility.

In July 2003, the Company remarketed two series of insurance-backed
pollution control bonds aggregating $151 million, reducing the interest rate
from 5.8% to 4%. Of the total amount of bonds remarketed, $92 million mature on
August 1, 2015 and $59 million mature on October 15, 2015.

On September 2, 2003, CenterPoint Houston and the lender parties thereto
amended the $1.3 billion term loan to, among other things, allow CenterPoint
Houston to issue an additional $500 million of debt secured by its general
mortgage bonds without requiring that the net proceeds be applied to prepay the
loans outstanding under that term loan.

On September 9, 2003, CenterPoint Houston issued $300 million aggregate
principal amount of 5.75% general mortgage bonds due January 15, 2014. This
issuance utilized $300 million of the additional debt capacity of CenterPoint
Houston described in the preceding paragraph. Proceeds were used to repay
approximately $258 million of intercompany notes payable to CenterPoint Energy
and to repay approximately $40 million of money pool borrowings. Proceeds in the
amount of approximately $292 million from the note and money pool repayments
were ultimately used by CenterPoint Energy to repay a portion of the term loan
under the Company's prior facility.

On September 9, 2003, the Company issued $200 million aggregate principal
amount of 7.25% senior notes due September 1, 2010. Proceeds in the amount of
approximately $198 million were used to repay a portion of the term loan under
the Company's prior facility.

As a result of the term loan repayments made from the proceeds of the
September 9, 2003 debt issuances by CenterPoint Houston and the Company
discussed above, in September 2003, the Company expensed $12.2 million of
unamortized loan costs that were associated with the term loan under the
Company's prior facility.

On November 3, 2003, CERC issued $160 million aggregate principal amount of
its 5.95% senior notes due 2014. CERC accepted $140 million aggregate principal
amount of CERC's TERM Notes maturing in November 2003 and $1.25 million as
consideration for the unsecured senior notes. CERC retired the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

TERM notes received and used the remaining proceeds to finance remaining costs
of issuance of the notes and for general corporate purposes.

On December 17, 2003, the Company issued $255 million aggregate principal
amount of convertible senior notes due January 15, 2024 with an interest rate of
2.875%. Holders may convert each of their notes into shares of CenterPoint
Energy common stock, initially at a conversion rate of 78.064 shares of common
stock per $1,000 principal amount of notes at any time prior to maturity, under
the following circumstances: (1) if the last reported sale price of CenterPoint
Energy common stock for at least 20 trading days during the period of 30
consecutive trading days ending on the last trading day of the previous calendar
quarter is greater than or equal to 120% of the conversion price per share of
CenterPoint Energy common stock on such last trading day, (2) if the notes have
been called for redemption, (3) during any period in which the credit ratings
assigned to the notes by both Moody's and S&P are lower than Ba2 and BB,
respectively, or the notes are no longer rated by at least one of these ratings
services or their successors, or (4) upon the occurrence of specified corporate
transactions, including the distribution to all holders of CenterPoint Energy
common stock of certain rights entitling them to purchase shares of CenterPoint
Energy common stock at less than the last reported sale price of a share of
CenterPoint Energy common stock on the trading day prior to the declaration date
of the distribution or the distribution to all holders of CenterPoint Energy
common stock of the Company's assets, debt securities or certain rights to
purchase the Company's securities, which distribution has a per share value
exceeding 15% of the last reported sale price of a share of CenterPoint Energy
common stock on the trading day immediately preceding the declaration date for
such distribution. CenterPoint Energy may elect to satisfy part or all of its
conversion obligation by delivering cash in lieu of shares of CenterPoint Energy
common stock. The convertible senior notes also have a contingent interest
feature requiring contingent interest to be paid to holders of notes commencing
on or after January 15, 2007, in the event that the average trading price of a
note for the applicable five-trading-day period equals or exceeds 120% of the
principal amount of the note as of the day immediately preceding the first day
of the applicable six-month interest period. For any six-month period,
contingent interest will be equal to 0.25% of the average trading price of the
note for the applicable five-trading-day period. Proceeds from the issuance of
the convertible senior notes were used to redeem, in January 2004, $250 million
liquidation amount of the 8.125% trust preferred securities issued by HL&P
Capital Trust I. Pending such use, the net proceeds were used to repay a portion
of the outstanding borrowings under the Company's revolving credit facility.

In February 2004, $56 million aggregate principal amount of collateralized
5.6% pollution control bonds due 2027 and $44 million aggregate principal amount
of 4.25% collateralized insurance-backed pollution control bonds due 2017 were
issued on behalf of CenterPoint Houston. The pollution control bonds are
collateralized by general mortgage bonds of CenterPoint Houston with principal
amounts, interest rates and maturities that match the pollution control bonds.
The proceeds were used to redeem two series of 6.7% collateralized pollution
control bonds with an aggregate principal amount of $100 million issued on
behalf of CenterPoint Energy. CenterPoint Houston's 6.7% first mortgage bonds
which collateralized CenterPoint Energy's payment obligations under the refunded
pollution control bonds were retired in connection with the March 2004
redemption of the refunded pollution control bonds. CenterPoint Houston's 6.7%
notes payable to CenterPoint Energy were also extinguished upon the redemption
of the refunded pollution control bonds.

Junior Subordinated Debentures (Trust Preferred Securities). In February
1997, two Delaware statutory business trusts created by CenterPoint Energy (HL&P
Capital Trust I and HL&P Capital Trust II) issued to the public (a) $250 million
aggregate amount of preferred securities and (b) $100 million aggregate amount
of capital securities, respectively. In February 1999, a Delaware statutory
business trust created by CenterPoint Energy (REI Trust I) issued $375 million
aggregate amount of preferred securities to the public. Each of the trusts used
the proceeds of the offerings to purchase junior subordinated debentures issued
by CenterPoint Energy having interest rates and maturity dates that correspond
to the distribution rates and the mandatory redemption dates for each series of
preferred securities or capital securities. As discussed in

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Note 2(n), upon the Company's adoption of FIN 46, the junior subordinated
debentures discussed above are included in long-term debt as of December 31,
2003.

The junior subordinated debentures are the trusts' sole assets and their
entire operations. CenterPoint Energy considers its obligations under the
Amended and Restated Declaration of Trust, Indenture, Guaranty Agreement and,
where applicable, Agreement as to Expenses and Liabilities, relating to each
series of preferred securities or capital securities, taken together, to
constitute a full and unconditional guarantee by CenterPoint Energy of each
trust's obligations with respect to the respective series of preferred
securities or capital securities.

The preferred securities and capital securities are mandatorily redeemable
upon the repayment of the related series of junior subordinated debentures at
their stated maturity or earlier redemption. Subject to some limitations,
CenterPoint Energy has the option of deferring payments of interest on the
junior subordinated debentures. During any deferral or event of default,
CenterPoint Energy may not pay dividends on its capital stock. As of December
31, 2003, no interest payments on the junior subordinated debentures had been
deferred.

The outstanding aggregate liquidation amount, distribution rate and
mandatory redemption date of each series of the preferred securities or capital
securities of the trusts described above and the identity and similar terms of
each related series of junior subordinated debentures are as follows:

(1) The preferred securities issued by HL&P Capital Trust I having an aggregate
liquidation amount of $250 million were redeemed at 100% of their aggregate
liquidation amount in January 2004.

In June 1996, a Delaware statutory business trust created by CERC Corp.
(CERC Trust) issued $173 million aggregate amount of convertible preferred
securities to the public. CERC Trust used the proceeds of the offering to
purchase convertible junior subordinated debentures issued by CERC Corp. having
an interest rate and maturity date that correspond to the distribution rate and
mandatory redemption date of the convertible preferred securities. The
convertible junior subordinated debentures represent CERC Trust's sole asset and
its entire operations. CERC Corp. considers its obligation under the Amended and
Restated Declaration of Trust, Indenture and Guaranty Agreement relating to the
convertible preferred securities, taken together, to constitute a full and
unconditional guarantee by CERC Corp. of CERC Trust's obligations with respect
to the convertible preferred securities.

The convertible preferred securities are mandatorily redeemable upon the
repayment of the convertible junior subordinated debentures at their stated
maturity or earlier redemption. Effective January 7, 2003, the convertible
preferred securities are convertible at the option of the holder into $33.62 of
cash and 2.34 shares of CenterPoint Energy common stock for each $50 of
liquidation value. As of December 31, 2002 and 2003, $0.4 million liquidation
amount of convertible preferred securities were outstanding. The securities, and
their

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

underlying convertible junior subordinated debentures, bear interest at 6.25%
and mature in June 2026. Subject to some limitations, CERC Corp. has the option
of deferring payments of interest on the convertible junior subordinated
debentures. During any deferral or event of default, CERC Corp. may not pay
dividends on its common stock to CenterPoint Energy. As of December 31, 2003, no
interest payments on the convertible junior subordinated debentures had been
deferred.

Maturities. The Company's maturities of long-term debt, capital leases and
sinking fund requirements, excluding the ZENS obligation and $250 million of
securities called for redemption in 2004, are $57 million in 2004, $1.7 billion
in 2005, $1.7 billion in 2006, $69 million in 2007 and $572 million in 2008. The
2004 amount is net of sinking fund payments that can be satisfied with bonds
that had been acquired and retired as of December 31, 2003.

Liens. As of December 31, 2003, CenterPoint Houston's assets were subject
to liens securing approximately $482 million of first mortgage bonds. Sinking or
improvement fund and replacement fund requirements on the first mortgage bonds
may be satisfied by certification of property additions. Sinking fund and
replacement fund requirements for 2001, 2002 and 2003 have been satisfied by
certification of property additions. The replacement fund requirement to be
satisfied in 2004 is approximately $142 million, and the sinking fund
requirement to be satisfied in 2004 is approximately $4 million. The Company
expects CenterPoint Houston to meet these 2004 obligations by certification of
property additions. At December 31, 2003, CenterPoint Houston's assets were also
subject to liens securing approximately $3.1 billion of general mortgage bonds
which are junior to the liens of the first mortgage bonds. Texas Genco's $75
million revolving credit facility is secured by a series of first mortgage bonds
issued by Texas Genco LP, in an aggregate principal amount of $75 million under
a First Mortgage Indenture (the Texas Genco Mortgage) dated December 23, 2003
between JPMorgan Chase Bank, as trustee, and Texas Genco, LP. All of Texas
Genco's real and tangible properties, subject to certain exclusions, are
currently subject to the lien of the Texas Genco Mortgage. Under the terms of
the facility, if CenterPoint Energy ceases to own, directly or indirectly, at
least a 50% voting and economic interest in Texas Genco, LP, an event of default
will occur and any borrowings thereunder may become immediately due and payable.

Securitization. For a discussion of the securitization financing completed
in October 2001, see Note 4(a).

Transportation Agreement. A subsidiary of CERC Corp. had an agreement (ANR
Agreement) with ANR Pipeline Company (ANR) that contemplated that this
subsidiary would transfer to ANR an interest in some of CERC Corp.'s pipeline
and related assets. In 2001, this subsidiary was transferred to Reliant
Resources as a result of CenterPoint Energy's planned divestiture of certain
unregulated business operations. However, CERC retained the pipelines covered by
the ANR Agreement. Therefore, the subsequent divestiture of Reliant Resources by
CenterPoint Energy on September 30, 2002, resulted in a conversion of CERC's
obligation to ANR into an obligation to Reliant Resources. As of December 31,
2002, the Company had recorded $5 million and $36 million in current portion of
long-term debt and long-term debt, respectively, and as of December 31, 2003,
the Company had recorded $-0- and $36 million in current portion of long-term
debt and long-term debt, respectively, in its Consolidated Balance Sheets to
reflect this obligation for the use of 130 million cubic feet (Mmcf)/day of
capacity in some of CERC's transportation facilities. The volume of
transportation declined to 100 Mmcf/day in the year 2003 and CERC refunded $5
million to Reliant Resources. The ANR Agreement will terminate in 2005 with a
refund of $36 million to Reliant Resources.

The Company has long-term incentive compensation plans (LICPs) that provide
for the issuance of stock-based incentives, including performance-based shares,
performance-based units, restricted shares, stock

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

options and stock appreciation rights to directors, officers and key employees.
A maximum of approximately 37 million shares of CenterPoint Energy common stock
may be issued under these plans.

Performance-based shares, performance-based units and restricted shares are
granted to employees without cost to the participants. The performance shares
and units vest three years after the grant date based upon the performance of
the Company over a three-year cycle, except as discussed below. The restricted
shares vest at various times ranging from immediately to at the end of a
three-year period. Upon vesting, the shares are issued to the plan participants.

During 2001, 2002 and 2003, the Company recorded compensation expense of $6
million, $2 million and $9 million, respectively, related to performance-based
shares, performance-based units and restricted share grants. Included in these
amounts is $5 million in compensation expense for 2001 related to Reliant
Resources' participants. In addition, compensation benefit of $1 million was
recorded in 2002 related to Reliant Resources' participants. Amounts for Reliant
Resources' participants are reflected in discontinued operations in the
Statements of Consolidated Operations.

The following table summarizes the Company's performance-based units,
performance-based shares and restricted share grant activity for the years 2001
through 2003:

The maximum value associated with the performance-based units granted in
2001 was $150 per unit.

Effective with the Reliant Resources Distribution which occurred on
September 30, 2002, the Company's compensation committee authorized the
conversion of outstanding CenterPoint Energy performance-based

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shares for the performance cycle ending December 31, 2002 to a number of
restricted shares of CenterPoint Energy's common stock equal to the number of
performance-based shares that would have vested if the performance objectives
for the performance cycle were achieved at the maximum level for substantially
all shares. These restricted shares vested if the participant holding the shares
remained employed with the Company or with Reliant Resources and its
subsidiaries through December 31, 2002. On the date of the Reliant Resources
Distribution, holders of these restricted shares received shares of Reliant
Resources common stock in the same manner as other holders of CenterPoint Energy
common stock, but these shares of common stock were subject to the same vesting
schedule, as well as to the terms and conditions of the plan under which the
original performance shares were granted. Thus, following the Reliant Resources
Distribution, employees who held performance-based shares under the LICP for the
performance cycle ending December 31, 2002 held restricted shares of CenterPoint
Energy common stock and restricted shares of Reliant Resources common stock,
which vested following continuous employment through December 31, 2002.

Effective with the Reliant Resources Distribution, the Company converted
all outstanding CenterPoint Energy stock options granted prior to the Reliant
Resources Offering to a combination of adjusted CenterPoint Energy stock options
and Reliant Resources stock options. For the converted stock options, the sum of
the intrinsic value of the CenterPoint Energy stock options immediately prior to
the record date of the Reliant Resources Distribution equaled the sum of the
intrinsic values of the adjusted CenterPoint Energy stock options and the
Reliant Resources stock options granted immediately after the record date of the
Reliant Resources Distribution. As such, Reliant Resources employees who do not
work for the Company hold stock options of the Company. Both the number and the
exercise price of all outstanding CenterPoint Energy stock options that were
granted on or after the Reliant Resources Offering were adjusted to maintain the
total intrinsic value of the grants.

During January 2003, due to the Texas Genco Distribution, the Company
granted additional CenterPoint Energy shares to participants with
performance-based and restricted shares that had not yet vested as of the record
date of December 20, 2002. These additional shares are subject to the same
vesting schedule and the terms and conditions of the plan under which the
original shares were granted. Also in connection with this distribution, both
the number and the exercise price of all outstanding CenterPoint Energy stock
options were adjusted to maintain the total intrinsic value of the stock option
grants.

Under the Company's plans, stock options generally become exercisable in
one-third increments on each of the first through third anniversaries of the
grant date. The exercise price is the average of the high and low sales price of
the common stock on the New York Stock Exchange on the grant date. The Company
applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25), and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized for these fixed stock options. The following table summarizes stock
option activity related to the Company for the years 2001 through 2003:

Exercise prices for CenterPoint Energy stock options outstanding held by
Company employees ranged from $4.78 to $32.26. The following tables provide
information with respect to outstanding CenterPoint Energy stock options held by
the Company's employees on December 31, 2003:

In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123), and SFAS No. 148, "Accounting for Stock-Based Compensation
Transition and Disclosure -- an Amendment of SFAS No. 123", the Company applies
the guidance contained in APB Opinion No. 25 and discloses the required
pro-forma effect on net income of the fair value based method of accounting for
stock compensation. The weighted average fair values at date of grant for
CenterPoint Energy options granted during 2001, 2002 and 2003 were $9.25, $1.40
and $1.66, respectively. The fair values were estimated using the Black-Scholes
option valuation model with the following assumptions:

Pro-forma information for 2001, 2002 and 2003 is provided to take into
account the amortization of stock-based compensation to expense on a
straight-line basis over the vesting period. Had compensation costs been
determined as prescribed by SFAS No. 123, the Company's net income and earnings
per share would have been as follows:

The Company maintains a non-contributory qualified defined benefit plan
covering substantially all employees, with benefits determined using a cash
balance formula. Under the cash balance formula, participants accumulate a
retirement benefit based upon 4% of eligible earnings and accrued interest.
Prior to 1999, the pension plan accrued benefits based on years of service,
final average pay and covered compensation. As a result, certain employees
participating in the plan as of December 31, 1998 are eligible to receive the
greater of the accrued benefit calculated under the prior plan through 2008 or
the cash balance formula.

The Company provides certain healthcare and life insurance benefits for
retired employees on a contributory and non-contributory basis. Employees become
eligible for these benefits if they have met certain age and service
requirements at retirement, as defined in the plans. Under plan amendments,
effective in early 1999, healthcare benefits for future retirees were changed to
limit employer contributions for medical coverage.

Such benefit costs are accrued over the active service period of employees.
The net unrecognized transition obligation, resulting from the implementation of
accrual accounting, is being amortized over approximately 20 years.

On January 12, 2004, the FASB issued FSP FAS 106-1. In accordance with FSP
FAS 106-1, the Company's postretirement benefits obligations and net periodic
postretirement benefit cost in the financial statements and accompanying notes
do not reflect the effects of the legislation. Specific authoritative guidance
on the accounting for the legislation is pending and that guidance, when issued,
may require the Company to change previously reported information.

The Company's net periodic cost includes the following components relating
to pension and postretirement benefits:

In determining net periodic benefits cost, the Company uses fair value, as
of the beginning of the year, as its basis for determining expected return on
plan assets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table displays the change in the benefit obligation, the fair
value of plan assets and the amounts included in the Company's Consolidated
Balance Sheets as of December 31, 2002 and 2003 for the Company's pension and
postretirement benefit plans:

Assumed healthcare cost trend rates have a significant effect on the
reported amounts for the Company's postretirement benefit plans. A 1% change in
the assumed healthcare cost trend rate would have the following effects:

In managing the investments associated with the benefit plans, the
Company's objective is to preserve and enhance the value of plan assets while
maintaining an acceptable level of volatility. These objectives are expected to
be achieved through an investment strategy, that manages liquidity requirements
while maintaining a long-term horizon in making investment decisions and
efficient and effective management of plan assets.

As part of the investment strategy discussed above, the Company has adopted
and maintains the following weighted average allocation targets for its benefit
plans:

The expected rate of return assumption was developed by reviewing the
targeted asset allocations and historical index performance of the applicable
asset classes over a 15-year period, adjusted for investment fees and
diversification effects.

Equity securities for the pension plan include CenterPoint Energy common
stock in the amounts of $38 million (4.7% of total pension plan assets) and $44
million (3.7% of total pension plan assets) and as of December 31, 2002 and
2003, respectively.

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The Company expects to contribute $38 million to its postretirement
benefits plan in 2004. Contributions to the pension plan are not required or
expected in 2004.

In addition to the non-contributory pension plans discussed above, the
Company maintains a non-qualified benefit restoration plan which allows
participants to retain the benefits to which they would have been entitled under
the Company's non-contributory pension plan except for the federally mandated
limits on these benefits or on the level of compensation on which these benefits
may be calculated. The expense associated with this non-qualified plan was $25
million, $9 million and $8 million in 2001, 2002 and 2003, respectively.
Included in the net benefit cost in 2001 and 2002 is $17 million and $3 million,
respectively, of expense related to Reliant Resources' participants, which is
reflected in discontinued operations in the Statements of Consolidated
Operations. The accrued benefit liability for the non-qualified pension plan was
$83 million and $75 million at December 31, 2002 and 2003, respectively. In
addition, these accrued benefit liabilities include the recognition of minimum
liability adjustments of $23 million as of December 31, 2002 and $15 million as
of December 31, 2003, which are reported as a component of other comprehensive
income, net of income tax effects.

The following table displays the Company's plans with accumulated benefit
obligations in excess of plan assets:

The Company has a qualified employee savings plan that includes a cash or
deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986,
as amended (the Code) and an Employee Stock Ownership Plan (ESOP) under Section
4975(e)(7) of the Code. Under the plan, participating employees may contribute a
portion of their compensation, on a pre-tax or after-tax basis, generally up to
a maximum of 16% of compensation. The Company matches 75% of the first 6% of
each employee's compensation contributed. The Company may contribute an
additional discretionary match of up to 50% of the first 6% of each employee's
compensation contributed. These matching contributions are fully vested at all
times. A substantial portion of the Company's match is initially invested in
CenterPoint Energy common stock through the ESOP.

Participating employees may elect to invest all or a portion of their
contributions to the plan in CenterPoint Energy common stock, to have dividends
reinvested in additional shares or to receive dividend payments in cash on any
investment in CenterPoint Energy common stock, and to transfer all or part of
their investment in CenterPoint Energy common stock to other investment options
offered by the plan.

The ESOP includes company stock which is encumbered by a loan. Upon the
release from the encumbrance of the loan, the Company may use released shares to
satisfy its obligation to make matching contributions under the Company's
savings plan. Generally, debt service on the loan is paid using all dividends on
shares currently or formerly encumbered by the loan, interest earnings on funds
held in trust and cash contributions by the Company. Shares of CenterPoint
Energy common stock are released from the encumbrance of the loan based on the
proportion of debt service paid during the period. It is anticipated that the
loan will be repaid in full in 2004 and all remaining shares of Company common
stock that secure the loan will be released from the encumbrance and allocated
to participant accounts under the plan in 2004.

The Company recognizes benefit expense equal to the fair value of the
shares committed to be released. The Company credits to unearned shares the
original purchase price of shares committed to be released to

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plan participants with the difference between the fair value of the shares and
the original purchase price recorded to common stock. Dividends on allocated
shares are recorded as a reduction to retained earnings. Dividends on
unallocated shares are recorded as a reduction of principal or accrued interest
on the loan.

Share balances currently or formerly encumbered by a loan at December 31,
2002 and 2003 were as follows:

(1) During 2002, unearned shares and total shares were increased by 831,500
shares due to additional shares purchased with proceeds from the sale of
Reliant Resources common stock, which was received in connection with the
Reliant Resources Distribution.

(2) During 2003, unearned shares and total shares were increased by 723,966
shares due to additional shares purchased with proceeds from the sale of
Texas Genco common stock, which was received in connection with the Texas
Genco Distribution.

As a result of the ESOP, the savings plan has significant holdings of
CenterPoint Energy common stock. As of December 31, 2003, an aggregate of
34,749,760 shares of CenterPoint Energy's common stock were held by the savings
plan, which represented 28% of its investments. Given the concentration of the
investments in CenterPoint Energy's common stock, the savings plan and its
participants have market risk related to this investment.

The Company's savings plan benefit expense was $51 million, $47 million and
$38 million in 2001, 2002 and 2003, respectively. Included in these amounts are
$16 million and $6 million of savings plan benefit expense for 2001 and 2002,
respectively, related to Reliant Resources' participants, which is reflected as
discontinued operations in the Statements of Consolidated Operations.

(d) POSTEMPLOYMENT BENEFITS

Net postemployment benefit costs for former or inactive employees, their
beneficiaries and covered dependents, after employment but before retirement
(primarily healthcare and life insurance benefits for participants in the
long-term disability plan) were $6 million, $12 million and $10 million in 2001,
2002 and 2003, respectively.

The Company's postemployment obligation is presented as a liability in the
Consolidated Balance Sheets under the caption "Benefit Obligations."

(e) OTHER NON-QUALIFIED PLANS

The Company has non-qualified deferred compensation plans that provide
benefits payable to directors, officers and certain key employees or their
designated beneficiaries at specified future dates, upon termination, retirement
or death. Benefit payments are made from the general assets of the Company.
During 2001, 2002 and 2003, the Company recorded benefit expense relating to
these programs of $17 million, $11 million and $13 million, respectively.
Included in the amounts are $4 million and $0.2 million of benefit expense for
2001 and 2002, related to Reliant Resources participants, which is reflected as
discontinued operations in the Statements of Consolidated Operations. Included
in "Benefit Obligations" in the accompanying Consolidated Balance Sheets at
December 31, 2002 and 2003 was $132 million and $127 million, respectively,
relating to deferred compensation plans.

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(f) CHANGE OF CONTROL AGREEMENTS AND OTHER EMPLOYEE MATTERS

In December 2003, the Company entered into agreements with certain of its
executive officers that generally provide, to the extent applicable, in the case
of a change of control of the Company and termination of employment, severance
benefits of up to three times annual base salary plus bonus and other benefits.

As of December 31, 2003, approximately 35% of the Company's employees are
subject to collective bargaining agreements. Three of these agreements, covering
approximately 14% of the Company's employees, have expired or will expire in
2004.

The 1,030 bargaining unit employees of Texas Genco were covered by a
collective bargaining unit agreement with the International Brotherhood of
Electrical Workers Local 66 that expired in September 2003. These bargaining
unit employees have continued to work without interruption and have not had any
work interruptions since 1976. Texas Genco continues to have a good relationship
with the bargaining unit and is actively negotiating to obtain a new agreement
in 2004.

The Minnegasco division of our natural gas distribution business has 512
bargaining unit employees that are covered by collective bargaining unit
agreements that have expired or will expire in 2004. An agreement with the
International Brotherhood of Electrical Workers Local 949, which expired in
December 2003, was renegotiated in February 2004 covering 267 of these
employees. The remaining 245 employees are covered by a collective bargaining
agreement with the Office and Professional Employees International Union Local
12, which expires in May 2004.

(11) INCOME TAXES

The Company's current and deferred components of income tax expense
(benefit) were as follows:

CenterPoint Energy's consolidated federal income tax returns have been
audited and settled through the 1996 tax year. The 1997 through 2000
consolidated federal income tax returns are currently under audit.

Tax Attribute Carryforwards. At December 31, 2003 the Company had $45
million and $348 million of federal and state net operating loss carryforwards,
respectively. The losses are available to offset future federal and state
taxable income through the year 2022. Substantially all of the state loss
carryforwards will expire between 2014 and 2020. The Company also had $333
million of capital loss carryforwards which will expire in 2007 and 2008.

In conjunction with the Reliant Resources Distribution in 2002, the Company
realized a previously unrecorded capital loss attributable to the excess of the
tax basis over the book carrying value in former subsidiaries sold to Reliant
Resources. The tax benefit of this excess tax basis is recorded under SFAS No.
109, "Accounting for Income Taxes", when realizable under the facts, such as a
loss from a previously deferred taxable disposition that is triggered by a
spin-off. In 2003, the Company realized additional capital losses attributable
to the disposition of the stock of foreign subsidiaries. Capital losses may be
used in the three taxable years preceding the year of the loss or the five
taxable years following the year of the loss. Federal tax law only allows
utilization of capital losses to offset capital gains. The Company believes that
some uncertainty exists with respect to the Company's ability to generate
capital gains during the utilization period; therefore, a valuation allowance
has been established for the carryforwards not expected to be realized.

The valuation allowance reflects a net increase of $68 million in 2002 and
a net decrease of $10 million in 2003. These net changes resulted from a
reassessment of the Company's future ability to use federal capital loss
carryforwards and state tax net operating loss carryforwards.

Tax Refunds. In 2003, the Company received income tax refunds from the
Internal Revenue Service of $203 million related to the federal tax net
operating loss and capital loss generated in 2002. Of this amount, $8 million
related to refunds generated from the carryback of the federal capital loss.

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(12) COMMITMENTS AND CONTINGENCIES

(a) COMMITMENTS

Environmental Capital Commitments. CenterPoint Energy anticipates
investing up to $131 million in capital and other special project expenditures
between 2004 and 2008 for environmental compliance. CenterPoint Energy
anticipates expenditures to be as follows (in millions):

Fuel and Purchased Power. Fuel commitments include several long-term coal,
lignite and natural gas contracts related to Texas power generation operations
and natural gas contracts related to the Company's natural gas distribution
operations, which have various quantity requirements and durations that are not
classified as non-trading derivatives assets and liabilities in the Company's
Consolidated Balance Sheets as of December 31, 2003 as these contracts meet the
SFAS No. 133 exception to be classified as "normal purchases contracts" or do
not meet the definition of a derivative. Minimum payment obligations for coal
and transportation agreements and lignite mining and lease agreements that
extend through 2012 are approximately $309 million in 2004, $251 million in
2005, $256 million in 2006, $248 million in 2007 and $162 million in 2008.
Minimum payment obligations for natural gas supply contracts are approximately
$1 billion in 2004, $565 million in 2005, $344 million in 2006, $171 million in
2007 and $24 million in 2008. Purchase commitments related to purchased power
are not material to CenterPoint Energy's operations.

(b) LEASE COMMITMENTS

The following table sets forth information concerning the Company's
obligations under non-cancelable long-term operating leases at December 31,
2003, which primarily consist of rental agreements for building space, data
processing equipment and vehicles, including major work equipment (in millions):

Total lease expense for all operating leases was $45 million, $47 million
and $46 million during 2001, 2002 and 2003, respectively.

(c) LEGAL, ENVIRONMENTAL AND OTHER REGULATORY MATTERS

Legal Matters

Reliant Resources Indemnified Litigation

The Company, CenterPoint Houston or their predecessor, Reliant Energy, and
certain of their former subsidiaries are named as defendants in several lawsuits
described below. Under a master separation agreement between Reliant Energy and
Reliant Resources, the Company and its subsidiaries are entitled to be
indemnified by Reliant Resources for any losses, including attorneys' fees and
other costs, arising out of the lawsuits described below under Electricity and
Gas Market Manipulation Cases and Other Class Action Lawsuits. Pursuant to the
indemnification obligation, Reliant Resources is defending the Company and its

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subsidiaries to the extent named in these lawsuits. The ultimate outcome of
these matters cannot be predicted at this time.

Electricity and Gas Market Manipulation Cases. A large number of lawsuits
have been filed against numerous market participants and remain pending in both
federal and state courts in California and Nevada in connection with the
operation of the electricity and natural gas markets in California and certain
other western states in 2000-2001, a time of power shortages and significant
increases in prices. These lawsuits, many of which have been filed as class
actions, are based on a number of legal theories, including violation of state
and federal antitrust laws, laws against unfair and unlawful business practices,
the federal Racketeer Influenced Corrupt Organization Act, false claims statutes
and similar theories and breaches of contracts to supply power to governmental
entities. Plaintiffs in these lawsuits, which include state officials and
governmental entities as well as private litigants, are seeking a variety of
forms of relief, including recovery of compensatory damages (in some cases in
excess of $1 billion), a trebling of compensatory damages and punitive damages,
injunctive relief, restitution, interest due, disgorgement, civil penalties and
fines, costs of suit, attorneys' fees and divestiture of assets. To date, some
of these complaints have been dismissed by the trial court and are on appeal,
but most of the lawsuits remain in early procedural stages. Our former
subsidiary, Reliant Resources, was a participant in the California markets,
owning generating plants in the state and participating in both electricity and
natural gas trading in that state and in western power markets generally.
Reliant Resources, some of its subsidiaries and in some cases, corporate
officers of some of those companies, have been named as defendants in these
suits.

The Company, CenterPoint Houston or their predecessor, Reliant Energy, have
also been named in approximately 25 of these lawsuits, which were instituted in
2002 and 2003 and are pending in state courts in San Diego, San Francisco and
Los Angeles Counties and in federal district courts in San Francisco, San Diego,
Los Angeles and Nevada. However, neither the Company nor Reliant Energy was a
participant in the electricity or natural gas markets in California. The Company
and Reliant Energy have been dismissed from certain of the lawsuits, either
voluntarily by the plaintiffs or by order of the court and the Company believes
it is not a proper defendant in the remaining cases and will continue to seek
dismissal from the remaining cases.

Other Class Action Lawsuits. Fifteen class action lawsuits filed in May,
June and July 2002 on behalf of purchasers of securities of Reliant Resources
and/or Reliant Energy have been consolidated in federal district court in
Houston. Reliant Resources and certain of its former and current executive
officers are named as defendants. Reliant Energy is also named as a defendant in
seven of the lawsuits. Two of the lawsuits also name as defendants the
underwriters of the initial public offering of Reliant Resources common stock in
May 2001 (Reliant Resources Offering). One lawsuit names Reliant Resources' and
Reliant Energy's independent auditors as a defendant. The consolidated amended
complaint seeks monetary relief purportedly on behalf of purchasers of common
stock of Reliant Energy or Reliant Resources during certain time periods ranging
from February 2000 to May 2002, including purchasers of common stock that can be
traced to the Reliant Resources Offering. The plaintiffs allege, among other
things, that the defendants misrepresented their revenues and trading volumes by
engaging in round-trip trades and improperly accounted for certain structured
transactions as cash-flow hedges, which resulted in earnings from these
transactions being accounted for as future earnings rather than being accounted
for as earnings in fiscal year 2001. In January 2004 the trial judge dismissed
the plaintiffs' allegations that the defendants had engaged in fraud, but claims
based on alleged misrepresentations in the registration statement issued in the
Reliant Resources Offering remain.

In February 2003, a lawsuit was filed by three individuals in federal
district court in Chicago against CenterPoint Energy and certain former and
current officers of Reliant Resources for alleged violations of federal
securities laws. The plaintiffs in this lawsuit allege that the defendants
violated federal securities laws by issuing false and misleading statements to
the public, and that the defendants made false and misleading statements as part
of an alleged scheme to inflate artificially trading volumes and revenues. In
addition, the plaintiffs assert claims of fraudulent and negligent
misrepresentation and violations of Illinois consumer law.

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In January 2004 the trial judge ordered dismissal of plaintiffs' claims on the
ground that they did not set forth a claim, but granted the plaintiffs leave to
amend their complaint.

In May 2002, three class action lawsuits were filed in federal district
court in Houston on behalf of participants in various employee benefits plans
sponsored by Reliant Energy. Reliant Energy and its directors are named as
defendants in all of the lawsuits. Two of the lawsuits have been dismissed
without prejudice. The remaining lawsuit alleges that the defendants breached
their fiduciary duties to various employee benefits plans, directly or
indirectly sponsored by Reliant Energy, in violation of the Employee Retirement
Income Security Act. The plaintiffs allege that the defendants permitted the
plans to purchase or hold securities issued by Reliant Energy when it was
imprudent to do so, including after the prices for such securities became
artificially inflated because of alleged securities fraud engaged in by the
defendants. The complaints seek monetary damages for losses suffered on behalf
of the plans and a putative class of plan participants whose accounts held
Reliant Energy or Reliant Resources securities, as well as equitable relief in
the form of restitution. In January 2004 the trial judge dismissed the
complaints against a number of defendants, but allowed the case to proceed
against members of the Reliant Energy benefits committee.

In October 2002, a derivative action was filed in the federal district
court in Houston, against the directors and officers of the Company. The
complaint sets forth claims for breach of fiduciary duty, waste of corporate
assets, abuse of control and gross mismanagement. Specifically, the shareholder
plaintiff alleges that the defendants caused the Company to overstate its
revenues through so-called "round trip" transactions. The plaintiff also alleges
breach of fiduciary duty in connection with the spin-off of Reliant Resources
and the Reliant Resources Offering. The complaint seeks monetary damages on
behalf of the Company as well as equitable relief in the form of a constructive
trust on the compensation paid to the defendants. In March 2003, the court
dismissed this case on the grounds that the plaintiff did not make an adequate
demand on the Company before filing suit. Thereafter, the plaintiff sent another
demand asserting the same claims.

The Company's board of directors investigated that demand and similar
allegations made in a June 28, 2002 demand letter sent on behalf of a Company
shareholder. The latter letter demanded that the Company take several actions in
response to alleged round-trip trades occurring in 1999, 2000, and 2001. In June
2003, the Board determined that these proposed actions would not be in the best
interests of the Company.

The Company believes that none of the lawsuits described under "Other Class
Action Lawsuits" has merit because, among other reasons, the alleged
misstatements and omissions were not material and did not result in any damages
to any of the plaintiffs.

Other Legal Matters

Texas Antitrust Action. In July 2003, Texas Commercial Energy filed a
lawsuit against Reliant Energy, Reliant Resources, Reliant Electric Solutions,
LLC, several other Reliant Resources subsidiaries and several other participants
in the ERCOT power market in federal court in Corpus Christi, Texas. The
plaintiff, a retail electricity provider in the Texas market served by ERCOT,
alleges that the defendants conspired to illegally fix and artificially increase
the price of electricity in violation of state and federal antitrust laws and
committed fraud and negligent misrepresentation. The lawsuit seeks damages in
excess of $500 million, exemplary damages, treble damages, interest, costs of
suit and attorneys' fees. In February 2004, this complaint was amended to add
the Company and CenterPoint Houston, as successors to Reliant Energy, and Texas
Genco, LP as defendants. The plaintiff's principal allegations have previously
been investigated by the Texas Utility Commission and found to be without merit.
The Company also believes the plaintiff's allegations are without merit and will
seek their dismissal.

Municipal Franchise Fee Lawsuits. In February 1996, the cities of Wharton,
Galveston and Pasadena (Three Cities) filed suit, for themselves and a proposed
class of all similarly situated cities in Reliant Energy's electric service
area, against Reliant Energy and Houston Industries Finance, Inc. (formerly a
wholly owned subsidiary of the Company's predecessor, Reliant Energy) alleging
underpayment of municipal franchise fees. The plaintiffs claimed that they were
entitled to 4% of all receipts of any kind for business conducted within these
cities over the previous four decades. After a jury trial of the original
claimant cities (but not the class of

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cities), the trial court decertified the class and reduced the damages awarded
by the jury to $1.7 million, including interest, plus an award of $13.7 million
in legal fees. Despite other jury findings for the plaintiffs, the trial court's
judgment was based on the jury's finding in favor of Reliant Energy on the
affirmative defense of laches, a defense similar to a statute of limitations
defense, due to the original claimant cities having unreasonably delayed
bringing their claims during the 43 years since the alleged wrongs began.
Following this ruling, 45 cities filed individual suits against Reliant Energy
in the District Court of Harris County.

On February 27, 2003, a state court of appeals in Houston rendered an
opinion reversing the judgment against the Company and rendering judgment that
the Three Cities take nothing by their claims. The court of appeals found that
the jury's finding of laches barred all of the Three Cities' claims and that the
Three Cities were not entitled to recovery of any attorneys' fees. The Three
Cities filed a petition for review at the Texas Supreme Court, which declined to
hear the case, although the time period for the Three Cities to file a motion
for rehearing has not yet expired. The extent to which issues in the Three
Cities case may affect the claims of the other cities served by CenterPoint
Houston cannot be assessed until judgments are final and no longer subject to
appeal.

Natural Gas Measurement Lawsuits. CERC Corp. and certain of its
subsidiaries are defendants in a suit filed in 1997 under the Federal False
Claims Act alleging mismeasurement of natural gas produced from federal and
Indian lands. The suit seeks undisclosed damages, along with statutory
penalties, interest, costs, and fees. The complaint is part of a larger series
of complaints filed against 77 natural gas pipelines and their subsidiaries and
affiliates. An earlier single action making substantially similar allegations
against the pipelines was dismissed by the federal district court for the
District of Columbia on grounds of improper joinder and lack of jurisdiction. As
a result, the various individual complaints were filed in numerous courts
throughout the country. This case has been consolidated, together with the other
similar False Claims Act cases, in the federal district court in Cheyenne,
Wyoming.

In addition, CERC Corp. and certain of its subsidiaries are defendants in
two mismeasurement lawsuits against approximately 245 pipeline companies and
their affiliates pending in state court in Stevens County, Kansas. In one case
(originally filed in May 1999 and amended four times), the plaintiffs purport to
represent a class of royalty owners who allege that the defendants have engaged
in systematic mismeasurement of the volume of natural gas for more than 25
years. The plaintiffs amended their petition in this suit in July 2003 in
response to an order from the judge denying certification of the plaintiffs'
alleged class. In the amendment the plaintiffs dismissed their claims against
certain defendants (including two CERC subsidiaries), limited the scope of the
class of plaintiffs they purport to represent and eliminated previously asserted
claims based on mismeasurement of the Btu content of the gas. The same
plaintiffs then filed a second lawsuit, again as representatives of a class of
royalty owners, in which they assert their claims that the defendants have
engaged in systematic mismeasurement of the Btu content of natural gas for more
than 25 years. In both lawsuits, the plaintiffs seek compensatory damages, along
with statutory penalties, treble damages, interest, costs and fees.

Gas Cost Recovery Litigation. In October 2002, a suit was filed in state
district court in Wharton County, Texas against the Company, CERC, Entex Gas
Marketing Company, and others alleging fraud, violations of the Texas Deceptive
Trade Practices Act, violations of the Texas Utilities Code, civil conspiracy
and violations of the Texas Free Enterprise and Antitrust Act. The plaintiffs
seek class certification, but no class has been certified. The plaintiffs allege
that defendants inflated the prices charged to certain consumers of natural gas.
In February 2003, a similar suit was filed against CERC in state court in Caddo
Parish, Louisiana purportedly on behalf of a class of residential or business
customers in Louisiana who allegedly have been overcharged for gas or gas
service provided by CERC. In February 2004, another suit was filed against CERC
in Calcasieu Parish, Louisiana, seeking to recover alleged overcharges for gas
or gas services allegedly provided by Entex without advance approval by the
LPSC. The plaintiffs in these cases seek injunctive and declaratory relief,
restitution for the alleged overcharges, exemplary damages or trebling of actual
damages and civil penalties. In these cases, the Company, CERC and Entex Gas
Marketing Company deny that they have overcharged any of their customers

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for natural gas and believe that the amounts recovered for purchased gas have
been in accordance with what is permitted by state regulatory authorities.

Environmental Matters

Clean Air Standards. The Texas electric restructuring law and regulations
adopted by the Texas Commission on Environmental Quality (TCEQ) in 2001 require
substantial reductions in emission of oxides of nitrogen (NOx) from electric
generating units. The Company is currently installing cost-effective controls at
its generating plants to comply with these requirements. Through December 31,
2003, the Company has invested $664 million for NOx emission control, and plans
to make expenditures of up to approximately $131 million during the years 2004
through 2007. Further revisions to these NOx standards may result from the
TCEQ's future rules, expected by 2007, implementing more stringent federal
eight-hour ozone standards. The Texas electric restructuring law provides for
stranded cost recovery for expenditures incurred before May 1, 2003 to achieve
the NOx reduction requirements. Incurred costs include costs for which
contractual obligations have been made. The Texas Utility Commission has
determined that the Company's emission control plan is the most cost-effective
option for achieving compliance with applicable air quality standards for the
Company's generating facilities and the final amount for recovery will be
determined in the 2004 True-Up Proceeding.

Hydrocarbon Contamination. CERC Corp. and certain of its subsidiaries are
among some of the defendants in lawsuits filed beginning in August 2001 in Caddo
Parish and Bossier Parish, Louisiana. The suits allege that, at some unspecified
date prior to 1985, the defendants allowed or caused hydrocarbon or chemical
contamination of the Wilcox Aquifer, which lies beneath property owned or leased
by certain of the defendants and which is the sole or primary drinking water
aquifer in the area. The primary source of the contamination is alleged by the
plaintiffs to be a gas processing facility in Haughton, Bossier Parish,
Louisiana known as the "Sligo Facility," which was formerly operated by a
predecessor in interest of CERC Corp. This facility was purportedly used for
gathering natural gas from surrounding wells, separating gasoline and
hydrocarbons from the natural gas for marketing, and transmission of natural gas
for distribution.

Beginning about 1985, the predecessors of certain CERC Corp. defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they owned or leased. This work has been done in
conjunction with and under the direction of the Louisiana Department of
Environmental Quality. The plaintiffs seek monetary damages for alleged damage
to the aquifer underlying their property, unspecified alleged personal injuries,
alleged fear of cancer, alleged property damage or diminution of value of their
property, and, in addition, seek damages for trespass, punitive, and exemplary
damages. The quantity of monetary damages sought is unspecified. The Company is
unable to estimate the monetary damages, if any, that the plaintiffs may be
awarded in these matters.

Manufactured Gas Plant Sites. CERC and its predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, remediation has been
completed on two sites, other than ongoing monitoring and water treatment. There
are five remaining sites in CERC's Minnesota service territory, two of which
CERC believes were neither owned nor operated by CERC, and for which CERC
believes it has no liability.

At December 31, 2003, CERC had accrued $19 million for remediation of
certain Minnesota sites. At December 31, 2003, the estimated range of possible
remediation costs for these sites was $8 million to $44 million based on
remediation continuing for 30 to 50 years. The cost estimates are based on
studies of a site or industry average costs for remediation of sites of similar
size. The actual remediation costs will be dependent upon the number of sites to
be remediated, the participation of other potentially responsible parties (PRP),
if any, and the remediation methods used. CERC has utilized an environmental
expense tracker mechanism in its rates in Minnesota to recover estimated costs
in excess of insurance recovery. CERC has collected or accrued $12.5 million as
of December 31, 2003 to be used for environmental remediation.

CERC has received notices from the United States Environmental Protection
Agency and others regarding its status as a PRP for other sites. CERC has been
named as a defendant in lawsuits under which

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contribution is sought for the cost to remediate former MGP sites based on the
previous ownership of such sites by former affiliates of CERC or its divisions.
The Company is investigating details regarding these sites and the range of
environmental expenditures for potential remediation. Based on current
information, the Company has not been able to quantify a range of environmental
expenditures for such sites.

Mercury Contamination. The Company's pipeline and distribution operations
have in the past employed elemental mercury in measuring and regulating
equipment. It is possible that small amounts of mercury may have been spilled in
the course of normal maintenance and replacement operations and that these
spills may have contaminated the immediate area with elemental mercury. This
type of contamination has been found by the Company at some sites in the past,
and the Company has conducted remediation at these sites. It is possible that
other contaminated sites may exist and that remediation costs may be incurred
for these sites. Although the total amount of these costs cannot be known at
this time, based on experience by the Company and that of others in the natural
gas industry to date and on the current regulations regarding remediation of
these sites, the Company believes that the costs of any remediation of these
sites will not be material to the Company's financial condition, results of
operations or cash flows.

Other Environmental. From time to time the Company has received notices
from regulatory authorities or others regarding its status as a PRP in
connection with sites found to require remediation due to the presence of
environmental contaminants. In addition, the Company has been named as a
defendant in litigation related to such sites and in recent years has been
named, along with numerous others, as a defendant in several lawsuits filed by a
large number of individuals who claim injury due to exposure to asbestos while
working at sites along the Texas Gulf Coast. Most of these claimants have been
workers who participated in construction of various industrial facilities,
including power plants, and some of the claimants have worked at locations owned
by the Company. The Company anticipates that additional claims like those
received may be asserted in the future and intends to continue vigorously
contesting claims which it does not consider to have merit. Although their
ultimate outcome cannot be predicted at this time, the Company does not believe,
based on its experience to date, that these matters, either individually or in
the aggregate, will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.

Other Proceedings

The Company is involved in other legal, environmental, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding matters arising in the ordinary course of business. Some of
these proceedings involve substantial amounts. The Company's management
regularly analyzes current information and, as necessary, provides accruals for
probable liabilities on the eventual disposition of these matters. The Company's
management believes that the disposition of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.

(d) NUCLEAR INSURANCE

Texas Genco and the other owners of the South Texas Project maintain
nuclear property and nuclear liability insurance coverage as required by law and
periodically review available limits and coverage for additional protection. The
owners of the South Texas Project currently maintain $2.75 billion in property
damage insurance coverage, which is above the legally required minimum, but is
less than the total amount of insurance currently available for such losses.

Pursuant to the Price Anderson Act, the maximum liability to the public of
owners of nuclear power plants was $10.6 billion as of December 31, 2003. Owners
are required under the Price Anderson Act to insure their liability for nuclear
incidents and protective evacuations. Texas Genco and the other owners of the
South Texas Project currently maintain the required nuclear liability insurance
and participate in the industry retrospective rating plan under which the owners
of the South Texas Project are subject to maximum retrospective assessments in
the aggregate per incident of up to $100.6 million per reactor. The owners are
jointly and severally liable at a rate not to exceed $10 million per incident
per year. In addition, the security procedures at this facility have been
enhanced to provide additional protection against terrorist attacks.

123

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

There can be no assurance that all potential losses or liabilities will be
insurable, or that the amount of insurance will be sufficient to cover them. Any
substantial losses not covered by insurance would have a material effect on the
Company's financial condition, results of operations and cash flows.

(e) NUCLEAR DECOMMISSIONING

CenterPoint Houston contributed $14.8 million in 2001 to trusts established
to fund Texas Genco's share of the decommissioning costs for the South Texas
Project. CenterPoint Houston contributed $2.9 million in both 2002 and 2003 to
these trusts. There are various investment restrictions imposed upon Texas Genco
by the Texas Utility Commission and the United States Nuclear Regulatory
Commission (NRC) relating to Texas Genco's nuclear decommissioning trusts. Texas
Genco and CenterPoint Energy have each appointed two members to the Nuclear
Decommissioning Trust Investment Committee which establishes the investment
policy of the trusts and oversees the investment of the trusts' assets. The
securities held by the trusts for decommissioning costs had an estimated fair
value of $189 million as of December 31, 2003, of which approximately 37% were
fixed-rate debt securities and the remaining 63% were equity securities. For a
discussion of the accounting treatment for the securities held in the nuclear
decommissioning trust, see Note 2(k). In July 1999, an outside consultant
estimated Texas Genco's portion of decommissioning costs to be approximately
$363 million. While the funding levels currently exceed minimum NRC
requirements, no assurance can be given that the amounts held in trust will be
adequate to cover the actual decommissioning costs of the South Texas Project.
Such costs may vary because of changes in the assumed date of decommissioning
and changes in regulatory requirements, technology and costs of labor, materials
and equipment. Pursuant to the Texas electric restructuring law, costs
associated with nuclear decommissioning that have not been recovered as of
January 1, 2002, will continue to be subject to cost-of-service rate regulation
and will be included in a charge to transmission and distribution customers. For
information regarding the effect of the business separation plan on funding of
the nuclear decommissioning trust fund, see Note 4(c).

(13) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of cash and cash equivalents, investments in debt and
equity securities classified as "available-for-sale" and "trading" in accordance
with SFAS No. 115, and short-term borrowings are estimated to be approximately
equivalent to carrying amounts and have been excluded from the table below. The
fair values of non-trading derivative assets and liabilities are equivalent to
their carrying amounts in the Consolidated Balance Sheets at December 31, 2002
and 2003 and have been determined using quoted market prices for the same or
similar instruments when available or other estimation techniques (see Note 5).
Therefore, these financial instruments are stated at fair value and are excluded
from the table below.

The trust preferred securities were deconsolidated effective December 31,
2003 pursuant to the adoption of FIN 46. This resulted in the junior
subordinated debentures held by the trusts being reported as long-term debt. For
further discussion, see Note 2(n).

124

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) EARNINGS PER SHARE

The following table reconciles numerators and denominators of the Company's
basic and diluted earnings per share (EPS) calculations:

(1) Options to purchase 2,074,437, 9,709,272 and 10,106,673 shares were
outstanding for the years ended December 31, 2001, 2002 and 2003,
respectively, but were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market
price of the common shares for the respective years.

125

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15) UNAUDITED QUARTERLY INFORMATION

The consolidated financial statements have been prepared to reflect the
effect of the Reliant Resources Distribution, the sale of the Company's
remaining Latin America operations subsequent to December 31, 2002 and the sale
of CEMS in November 2003 as described in Note 3. The consolidated financial
statements present the Reliant Resources businesses and the Company's Latin
America and CEMS operations as discontinued operations, in accordance with SFAS
No. 144. Accordingly, the consolidated financial statements reflect these
operations as discontinued operations for each of the three years in the period
ended December 31, 2003.

(1) Quarterly earnings per common share are based on the weighted average number
of shares outstanding during the quarter, and the sum of the quarters may
not equal annual earnings per common share.

(16) REPORTABLE BUSINESS SEGMENTS

The Company's determination of reportable business segments considers the
strategic operating units under which the Company manages sales, allocates
resources and assesses performance of various products and services to wholesale
or retail customers in differing regulatory environments. The accounting
policies of the business segments are the same as those described in the summary
of significant accounting policies except that some executive benefit costs have
not been allocated to business segments. Effective with the deregulation of the
Texas electric industry beginning January 1, 2002, the basis of business segment
reporting changed for the Company's electric operations. The Texas generation
operations of CenterPoint Energy's former integrated electric utility, Reliant
Energy HL&P, are a separate reportable business segment, Electric Generation,
whereas they previously had been part of the Electric Operations business
segment. The remaining transmission and distribution function is reported
separately in the Electric Transmission & Distribution business segment. Note
that certain estimates and allocations have been used to separate historical,
(pre-January 1, 2002) Electric Generation business segment data from the
Electric Transmission & Distribution business segment data. Reportable business
segments presented herein do not include the operations of Reliant Resources
which are presented as discontinued operations within these consolidated
financial statements. Additionally, the Company's Latin America operations and
its energy management services business, which were previously reported in the
Other Operations business segment, are presented as discontinued operations
within these consolidated financial statements.

Long-lived assets include net property, plant and equipment, net goodwill
and other intangibles and equity investments in unconsolidated subsidiaries. The
Company accounts for intersegment sales as if the sales were to third parties,
that is, at current market prices.

The Company has identified the following reportable business segments:
Electric Transmission & Distribution, Electric Generation, Natural Gas
Distribution, Pipelines and Gathering and Other Operations.

127

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For a description of the financial reporting business segments, see Note 1.
Financial data for business segments and products and services are as follows:

(1) Sales to subsidiaries of Reliant Resources in 2002 and 2003 represented
approximately $820 million and $948 million, respectively, of CenterPoint
Houston's transmission and distribution revenues since deregulation began in
2002.

(2) Sales to subsidiaries of Reliant Resources represented approximately 67% and
71% of Texas Genco's total revenues in 2002 and 2003, respectively. Sales to
another major customer in 2002 and 2003 represented approximately 15% and
10%, respectively, of Texas Genco's total revenues.

To the Board of Directors and Shareholders of
CenterPoint Energy, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of CenterPoint
Energy, Inc. and its subsidiaries (the Company) as of December 31, 2002 and
2003, and the related consolidated statements of operations, shareholders'
equity, comprehensive income and cash flows for each of the three years in the
period ended December 31, 2003. Our audits also included the financial statement
schedules listed in the Index at Item 15(a)(2). These financial statements and
the financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedules based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
2002 and 2003, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

As discussed in Note 3 to the consolidated financial statements, the
Company distributed its 83% ownership interest in Reliant Resources, Inc. on
September 30, 2002. The loss on distribution and the results of operations for
Reliant Resources, Inc. for periods prior to the distribution are included in
discontinued operations in the accompanying consolidated financial statements.

As discussed in Note 2(d) to the consolidated financial statements, on
January 1, 2002, the Company changed its method of accounting for goodwill and
certain intangible assets to conform to Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."

As discussed in Note 2(n) to the consolidated financial statements, on
January 1, 2003, the Company recorded asset retirement obligations to conform to
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations."

DELOITTE & TOUCHE LLP

Houston, Texas
March 12, 2004

130

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of December 31, 2003 to provide assurance that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.

There has been no change in our internal controls over financial reporting
that occurred during the three months ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The information called for by Item 10, to the extent not set forth in
"Executive Officers" in Item 1, is or will be set forth in the definitive proxy
statement relating to CenterPoint Energy's 2004 annual meeting of shareholders
pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a
meeting of shareholders involving the election of directors and the portions
thereof called for by Item 10 are incorporated herein by reference pursuant to
Instruction G to Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by Item 11 is or will be set forth in the
definitive proxy statement relating to CenterPoint Energy's 2004 annual meeting
of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the
portions thereof called for by Item 11 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.

The information called for by Item 12 is or will be set forth in the
definitive proxy statement relating to CenterPoint Energy's 2004 annual meeting
of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the
portions thereof called for by Item 12 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by Item 13 is or will be set forth in the
definitive proxy statement relating to CenterPoint Energy's 2004 annual meeting
of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the
portions thereof called for by Item 13 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information called for by Item 14 is or will be set forth in the
definitive proxy statement relating to CenterPoint Energy's 2004 annual meeting
of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the
portions thereof called for by Item 14 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.

(a)(1) Financial Statements.
Statements of Consolidated Operations for the Three
Years Ended December 31, 2003......................... 70
Statements of Consolidated Comprehensive Income for the
Three Years Ended December 31, 2003................... 71
Consolidated Balance Sheets at December 31, 2003 and
2002.................................................. 72
Statements of Consolidated Cash Flows for the Three
Years Ended December 31, 2003......................... 73
Statements of Consolidated Shareholders' Equity for the
Three Years Ended December 31, 2003................... 74
Notes to Consolidated Financial Statements............. 75
Independent Auditors' Report........................... 130
(a)(2) Financial Statement Schedules for the Three Years
Ended December 31, 2003.
I -- Condensed Financial Information of CenterPoint
Energy, Inc. (Parent Company) ........................ 134
II -- Qualifying Valuation Accounts.................... 141

The following schedules are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements:

III, IV and V.

(a)(3) Exhibits.

See Index of Exhibits on page 143, which index also includes the management
contracts or compensatory plans or arrangements required to be filed as exhibits
to this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K.

(g) Reports on Form 8-K.

On October 21, 2003, we filed a Current Report on Form 8-K dated October
21, 2003 in which we furnished information under Item 12 of that form relating
to our third quarter 2003 earnings.

On October 29, 2003, we filed a Current Report on Form 8-K dated October
28, 2003 to furnish under Item 9 of that form a slide presentation and
information regarding our external debt balances expected to be presented to
various members of the utility industry and the financial and investment
community at the 38th Annual Edison Electric Institute Financial conference.

On November 5, 2003, we filed a Current Report on Form 8-K dated October
29, 2003 announcing the pricing and closing of $160 million of senior notes by
our subsidiary, CenterPoint Energy Resources Corp., in a private placement with
institutions pursuant to Rule 144A under the Securities Act of 1933, as amended,
and Regulation S. The notes bear interest at a rate of 5.95% and will be due
January 15, 2014.

On November 7, 2003, we filed a Current Report on Form 8-K dated November
7, 2003 to provide information giving effect to certain reclassifications within
our historical consolidated financial statements, Selected Financial Data, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations as reported in our Current Report on Form 8-K dated May 12, 2003.

On December 9, 2003, we filed a Current Report on Form 8-K dated December
5, 2003 to report that Standard & Poor's Ratings Services affirmed its corporate
credit ratings on us, CenterPoint Houston and CERC and that the outlook was
revised to negative from stable.

On December 10, 2003, we filed a Current Report on Form 8-K dated December
20, 2003 to report that Fitch, Inc. affirmed its outstanding credit ratings on
us, CenterPoint Houston and CERC and that the outlook was revised to negative
from stable.

On December 12, 2003, we filed a Current Report on Form 8-K dated December
11, 2003 to report a failure at a diesel generator during a routine monthly
surveillance test at the South Texas Project nuclear facility.

132

On December 19, 2003, we filed a Current Report on Form 8-K dated December
10, 2003 to announce that we had priced and closed the sale of $225 million
aggregate principal amount of our convertible senior notes due 2024 through a
private offering (including $30 million received upon exercise of the initial
purchasers' option).

On January 29, 2004, we filed a Current Report on Form 8-K dated January
23, 2004 to report that Reliant Resources notified us it would not exercise its
option to purchase our 81% interest in Texas Genco.

On February 12, 2004, we filed a Current Report on Form 8-K dated February
12, 2004, in which we furnished information under Item 12 of that form relating
to our fourth quarter 2004 earnings.

On March 3, 2004, we filed a Current Report on Form 8-K dated March 3, 2004
to furnish under Item 9 of that form a slide presentation we expect will be
presented to various members of the financial and investment community from time
to time.

On March 10, 2004, we filed a Current Report on Form 8-K dated March 4,
2004 to report the administrative law judge's recommendation regarding
CenterPoint Houston's final fuel reconciliation proceeding and its effect on our
previously reported 2003 earnings.

(1) The condensed parent company financial statements and notes should be
read in conjunction with the consolidated financial statements and notes of
CenterPoint Energy, Inc. (CenterPoint Energy or the Company) appearing in the
Annual Report on Form 10-K. CenterPoint Energy, Inc. is a public utility holding
company that became the parent of Reliant Energy, Incorporated (Reliant Energy)
and its subsidiaries on August 31, 2002 as part of a corporate restructuring of
Reliant Energy (the Restructuring). CenterPoint Energy is a registered public
utility holding company under the 1935 Act. Prior to the Restructuring, Reliant
Energy was a public utility holding company that was exempt from registration
under the 1935 Act. After the Restructuring, an exemption was no longer
available for the corporate structure that the Texas Utility Commission required
CenterPoint Energy to adopt under the Texas electric restructuring law.
CenterPoint Energy did not conduct any activities other than those incident to
its formation until September 1, 2002. Accordingly, statements of operations and
cash flows would not provide meaningful information and have been omitted for
periods prior to September 1, 2002.

(2) As a registered public utility holding company, CenterPoint Energy and
its subsidiaries except Texas Genco Holdings, Inc. (Texas Genco) are subject to
a comprehensive regulatory scheme imposed by the Securities and Exchange
Commission (SEC) in order to protect customers, investors and the public
interest. Although the SEC does not regulate rates and charges under the 1935
Act, it does regulate the structure, financing, lines of business and internal
transactions of public utility holding companies and their system companies. In
order to obtain financing, acquire additional public utility assets or stock, or
engage in other significant transactions, CenterPoint Energy is required to
obtain approval from the SEC under the 1935 Act.

Prior to the Restructuring, CenterPoint Energy and Reliant Energy obtained
an order from the SEC that authorized the Restructuring transactions and granted
those companies certain authority with respect to system financing, dividends
and other matters.

CenterPoint Energy received an order from the SEC under the 1935 Act on
June 30, 2003 and supplemental orders thereafter relating to its financing
activities and those of its regulated subsidiaries, as well as other matters.
The orders are effective until June 30, 2005. As of December 31, 2003, the
orders generally permitted CenterPoint Energy and its regulated subsidiaries to
issue securities to refinance indebtedness outstanding at June 30, 2003, and
authorized CenterPoint Energy and its regulated subsidiaries to issue certain
incremental external debt securities and common and preferred stock through June
30, 2005, without prior authorization from the SEC. Further, the SEC has
reserved jurisdiction over the issuance by CenterPoint Energy and its regulated
subsidiaries of certain amounts of incremental external debt securities, so that
CenterPoint Energy is required to obtain SEC approval prior to issuing those
incremental amounts.

The orders require that if CenterPoint or any of its regulated subsidiaries
issues any security that is rated by a nationally recognized statistical rating
organization (NRSRO), the security to be issued must obtain an investment grade
rating from at least one NRSRO and, as a condition to such issuance, all
outstanding rated securities of the issuer and of CenterPoint Energy must be
rated investment grade by at least one NRSRO. The orders also contain certain
requirements for interest rates, maturities, issuance expenses and use of
proceeds. Under the orders, CenterPoint Energy's common equity as a percentage
of total capitalization must be at least 30%. The SEC has acknowledged that
prior to the monetization of Texas Genco and the securitization of the true-up
components, the Company's common equity as a percentage of total capitalization
is expected to remain less than 30%. In addition, after the securitization, the
Company's common equity as a percentage of total capitalization, including
securitized debt, is expected to be less than 30%, which the SEC has permitted
for other companies.

(3) On September 30, 2002, CenterPoint Energy distributed to its
shareholders 240 million shares of Reliant Resources common stock, which
represented CenterPoint Energy's approximately 83% ownership interest in Reliant
Resources, by means of a tax-free spin-off in the form of a dividend. Holders of
CenterPoint Energy common stock on the record date received 0.788603 shares of
Reliant Resources common stock for

137

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SCHEDULE I -- NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

each share of CenterPoint Energy stock that they owned on the record date. The
total value of the Reliant Resources Distribution, after the impairment charge
discussed below, was $847 million.

As a result of the spin-off of Reliant Resources, CenterPoint Energy
recorded a non-cash loss on disposal of discontinued operations of $4.4 billion
in 2002. This loss represented the excess of the carrying value of CenterPoint
Energy's net investment in Reliant Resources over the market value of Reliant
Resources' common stock. CenterPoint Energy's financial statements reflect the
reclassifications necessary to present Reliant Resources as discontinued
operations for all periods shown. Through the date of the spin-off, Reliant
Resources' assets and liabilities are shown in CenterPoint Energy's Consolidated
Balance Sheets as current and non-current assets and liabilities of discontinued
operations.

(4) CenterPoint Energy distributed approximately 19% of the 80 million
outstanding shares of common stock of Texas Genco to its shareholders on January
6, 2003. As a result of the distribution of Texas Genco common stock,
CenterPoint Energy recorded a pre-tax impairment charge of $399 million, which
was reflected as a regulatory asset in the Consolidated Balance Sheet as of
December 31, 2003. This impairment charge represents the excess of the carrying
value of CenterPoint Energy's net investment in Texas Genco over the market
value of Texas Genco's common stock. Additionally, in connection with the
distribution, CenterPoint Energy recorded minority interest ownership in Texas
Genco of $146 million in its Consolidated Balance Sheet in the first quarter of
2003.

(5) On October 7, 2003, the Company entered into a three-year credit
facility composed of a revolving credit facility of $1.4 billion and a $925
million term loan from institutional investors. The facility matures on October
7, 2006 and requires prepayments aggregating $20 million. Borrowings under the
revolver ($523 million at December 31, 2003) bear interest based on the London
inter-bank offered rate (LIBOR) under a pricing grid tied to the Company's
credit ratings. At the Company's current ratings, the interest rate for
borrowings under the revolver is LIBOR plus 300 basis points. The interest rate
for borrowings under the term loan is LIBOR plus 350 basis points. The Company's
Texas Genco stock is pledged to the lenders under the facility and the Company
has agreed to limit the dividend paid on its common stock to $0.10 per share per
quarter. The facility provides that until such time as the facility has been
reduced to $750 million, 100% of the net cash proceeds from any securitizations
relating to the recovery of the true-up components, after making any payments
required under CenterPoint Energy Houston Electric, LLC's $1.3 billion term
loan, and the net cash proceeds of any sales of the common stock of Texas Genco
owned by the Company or of material portions of Texas Genco's assets shall be
applied to repay loans under the facility and reduce that facility. Any money
raised in other future capital markets offerings and in the sale of other
significant assets is not required to be used to pay down the facility. The
facility requires the Company not to fall below a minimum interest coverage
ratio and not to exceed a maximum leverage ratio. The facility refinanced and
replaced a prior bank facility that, as of September 30, 2003, consisted of an
$856 million term loan and a $1.5 billion revolver. In connection with entering
into the new facility, the Company paid up-front fees of approximately $16
million and avoided a payment of $18 million which would have been due under the
prior facility on October 9, 2003. Additionally, in October 2003, the Company
expensed $21 million of unamortized loan costs associated with the prior
facility.

On April 9, 2003, the Company remarketed $175 million aggregate principal
amount of pollution control bonds that it had owned since the fourth quarter of
2002. Remarketed bonds maturing in 2029 have a principal amount of $75 million
and an interest rate of 8%. Remarketed bonds maturing in 2018 have a principal
amount of $100 million and an interest rate of 7.75%. Proceeds from the
remarketing were used to repay bank debt. At December 31, 2002, the $175 million
of bonds owned by the Company were not reflected as outstanding debt in the
Company's Consolidated Balance Sheets.

On May 19, 2003, the Company issued $575 million aggregate principal amount
of convertible senior notes due May 15, 2023 with an interest rate of 3.75%.
Holders may convert each of their notes into shares of CenterPoint Energy common
stock, initially at a conversion rate of 86.3558 shares of common stock

138

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SCHEDULE I -- NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

per $1,000 principal amount of notes at any time prior to maturity, under the
following circumstances: (1) if the last reported sale price of CenterPoint
Energy common stock for at least 20 trading days during the period of 30
consecutive trading days ending on the last trading day of the previous calendar
quarter is greater than or equal to 120% or, following May 15, 2008, 110% of the
conversion price per share of CenterPoint Energy common stock on such last
trading day, (2) if the notes have been called for redemption, (3) during any
period in which the credit ratings assigned to the notes by both Moody's
Investors Service, Inc. (Moody's) and Standard & Poor's Ratings Services (S&P),
a division of The McGraw-Hill Companies, are lower than Ba2 and BB,
respectively, or the notes are no longer rated by at least one of these ratings
services or their successors, or (4) upon the occurrence of specified corporate
transactions, including the distribution to all holders of CenterPoint Energy
common stock of certain rights entitling them to purchase shares of CenterPoint
Energy common stock at less than the last reported sale price of a share of
CenterPoint Energy common stock on the trading day prior to the declaration date
of the distribution or the distribution to all holders of CenterPoint Energy
common stock of the Company's assets, debt securities or certain rights to
purchase the Company's securities, which distribution has a per share value
exceeding 15% of the last reported sale price of a share of CenterPoint Energy
common stock on the trading day immediately preceding the declaration date for
such distribution. The convertible senior notes also have a contingent interest
feature requiring contingent interest to be paid to holders of notes commencing
on or after May 15, 2008, in the event that the average trading price of a note
for the applicable five trading day period equals or exceeds 120% of the
principal amount of the note as of the day immediately preceding the first day
of the applicable six-month interest period. For any six-month period,
contingent interest will be equal to 0.25% of the average trading price of the
note for the applicable five-trading-day period. Proceeds from the issuance of
the convertible senior notes were used for term loan repayments and to repay
revolver borrowings under the Company's prior facility in the amount of $557
million and $0.75 million, respectively.

On May 27, 2003, the Company issued $400 million aggregate principal amount
of senior notes composed of $200 million principal amount of 5-year notes with
an interest rate of 5.875% and $200 million principal amount of 12-year notes
with an interest rate of 6.85%. Proceeds in the amount of $397 million were used
for repayments of the term loan under the Company's prior facility.

In July 2003, the Company remarketed two series of insurance-backed
pollution control bonds aggregating $151 million, reducing the interest rate
from 5.8% to 4%. Of the total amount of bonds remarketed, $92 million mature on
August 1, 2015 and $59 million mature on October 15, 2015.

On September 9, 2003, the Company issued $200 million aggregate principal
amount of 7.25% senior notes due September 1, 2010. Proceeds in the amount of
approximately $198 million were used to repay a portion of the term loan under
the Company's prior facility. As a result of the term loan repayments made from
the proceeds of the September 9, 2003 debt issuance, in September 2003, the
Company expensed $12.2 million of unamortized loan costs that were associated
with the term loan under the Company's prior facility.

On December 17, 2003, the Company issued $255 million aggregate principal
amount of convertible senior notes due January 15, 2024 with an interest rate of
2.875%. Holders may convert each of their notes into shares of CenterPoint
Energy common stock, initially at a conversion rate of 78.064 shares of common
stock per $1,000 principal amount of notes at any time prior to maturity, under
the following circumstances: (1) if the last reported sale price of CenterPoint
Energy common stock for at least 20 trading days during the period of 30
consecutive trading days ending on the last trading day of the previous calendar
quarter is greater than or equal to 120% of the conversion price per share of
CenterPoint Energy common stock on such last trading day, (2) if the notes have
been called for redemption, (3) during any period in which the credit ratings
assigned to the notes by both Moody's and S&P are lower than Ba2 and BB,
respectively, or the notes are no longer rated by at least one of these ratings
services or their successors, or (4) upon the occurrence of specified corporate
transactions, including the distribution to all holders of CenterPoint Energy
common stock of certain rights

139

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SCHEDULE I -- NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

entitling them to purchase shares of CenterPoint Energy common stock at less
than the last reported sale price of a share of CenterPoint Energy common stock
on the trading day prior to the declaration date of the distribution or the
distribution to all holders of CenterPoint Energy common stock of the Company's
assets, debt securities or certain rights to purchase the Company's securities,
which distribution has a per share value exceeding 15% of the last reported sale
price of a share of CenterPoint Energy common stock on the trading day
immediately preceding the declaration date for such distribution. CenterPoint
Energy may elect to satisfy part or all of its conversion obligation by
delivering cash in lieu of shares of CenterPoint Energy common stock. The
convertible senior notes also have a contingent interest feature requiring
contingent interest to be paid to holders of notes commencing on or after
January 15, 2007, in the event that the average trading price of a note for the
applicable five-trading-day period equals or exceeds 120% of the principal
amount of the note as of the day immediately preceding the first day of the
applicable six-month interest period. For any six-month period, contingent
interest will be equal to 0.25% of the average trading price of the note for the
applicable five-trading-day period. Proceeds from the issuance of the
convertible senior notes were used to redeem, in January 2004, $250 million
liquidation amount of the 8.125% trust preferred securities issued by HL&P
Capital Trust I. Pending such use, the net proceeds were used to repay a portion
of the outstanding borrowings under the Company's revolving credit facility.

(1) Deductions from reserves represent losses or expenses for which the
respective reserves were created. In the case of the uncollectible accounts
reserve, such deductions are net of recoveries of amounts previously written
off.

141

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, the State of Texas, on the 12th day of March, 2004.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 12, 2004.

Exhibits not incorporated by reference to a prior filing are designated by
a cross (+); all exhibits not so designated are incorporated herein by reference
to a prior filing as indicated. Exhibits designated by an asterisk (*) are
management contracts or compensatory plans or arrangements required to be filed
as exhibits to this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K.

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
2 -- Agreement and Plan of CenterPoint Energy's Form 10-K 1-31447 2
Merger, dated as of October for the year ended December 31,
19, 2001, by and among 2001
Reliant Energy, Incorporated
("Reliant Energy"),
CenterPoint Energy, Inc.
("CenterPoint Energy") and
Reliant Energy MergerCo,
Inc.
3(a)(1) -- Amended and Restated CenterPoint Energy's 3-69502 3.1
Articles of Incorporation of Registration Statement on Form
CenterPoint Energy S-4
3(a)(2) -- Articles of Amendment to CenterPoint Energy's Form 10-K 1-31447 3.1.1
Amended and Restated for the year ended December 31,
Articles of Incorporation of 2001
CenterPoint Energy
3(b) -- Amended and Restated Bylaws CenterPoint Energy's Form 10-K 1-31447 3.2
of CenterPoint Energy for the year ended December 31,
2001
3(c) -- Statement of Resolution CenterPoint Energy's Form 10-K 1-31447 3.3
Establishing Series of for the year ended December 31,
Shares designated Series A 2001
Preferred Stock of
CenterPoint Energy
4(a) -- Form of CenterPoint Energy CenterPoint Energy's 3-69502 4.1
Stock Certificate Registration Statement on Form
S-4
4(b) -- Rights Agreement dated CenterPoint Energy's Form 10-K 1-31447 4.2
January 1, 2002, between for the year ended December 31,
CenterPoint Energy and 2001
JPMorgan Chase Bank, as
Rights Agent
4(c) -- Contribution and CenterPoint Energy's Form 10-K 1-31447 4.3
Registration Agreement dated for the year ended December 31,
December 18, 2001 among 2001
Reliant Energy, CenterPoint
Energy and the Northern
Trust Company, trustee under
the Reliant Energy,
Incorporated Master
Retirement Trust

143

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
4(d)(1) -- Mortgage and Deed of Trust, HL&P's Form S-7 filed on August 2-59748 2(b)
dated November 1, 1944 25, 1977
between Houston Lighting and
Power Company ("HL&P") and
Chase Bank of Texas,
National Association
(formerly, South Texas
Commercial National Bank of
Houston), as Trustee, as
amended and supplemented by
20 Supplemental Indentures
thereto
4(d)(2) -- Twenty-First through HL&P's Form 10-K for the year 1-3187 4(a)(2)
Fiftieth Supplemental ended December 31, 1989
Indentures to Exhibit
4(a)(1)
4(d)(3) -- Fifty-First Supplemental HL&P's Form 10-Q for the quarter 1-3187 4(a)
Indenture to Exhibit 4(a)(1) ended June 30, 1991
dated as of March 25, 1991
4(d)(4) -- Fifty-Second through HL&P's Form 10-Q for the quarter 1-3187 4
Fifty-Fifth Supplemental ended March 31, 1992
Indentures to Exhibit
4(a)(1) each dated as of
March 1, 1992
4(d)(5) -- Fifty-Sixth and HL&P's Form 10-Q for the quarter 1-3187 4
Fifty-Seventh Supplemental ended September 30, 1992
Indentures to Exhibit
4(a)(1) each dated as of
October 1, 1992
4(d)(6) -- Fifty-Eighth and Fifty-Ninth HL&P's Form 10-Q for the quarter 1-3187 4
Supplemental Indentures to ended March 31, 1993
Exhibit 4(a)(1) each dated
as of March 1, 1993
4(d)(7) -- Sixtieth Supplemental HL&P's Form 10-Q for the quarter 1-3187 4
Indenture to Exhibit 4(a)(1) ended June 30, 1993
dated as of July 1, 1993
4(d)(8) -- Sixty-First through HL&P's Form 10-K for the year 1-3187 4(a)(8)
Sixty-Third Supplemental ended December 31, 1993
Indentures to Exhibit
4(a)(1) each dated as of
December 1, 1993
4(d)(9) -- Sixty-Fourth and Sixty-Fifth HL&P's Form 10-K for the year 1-3187 4(a)(9)
Supplemental Indentures to ended December 31, 1995
Exhibit 4(a)(1) each dated
as of July 1, 1995
4(e)(1) -- General Mortgage Indenture, CenterPoint Houston's Form 10-Q 1-3187 4(j)(1)
dated as of October 10, for the quarter ended September
2002, between CenterPoint 30, 2002
Energy Houston Electric, LLC
and JPMorgan Chase Bank, as
Trustee
4(e)(2) -- First Supplemental Indenture CenterPoint Houston's Form 10-Q 1-3187 4(j)(2)
to Exhibit 4(e)(1), dated as for the quarter ended September
of October 10, 2002 30, 2002

144

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
4(e)(3) -- Second Supplemental CenterPoint Houston's Form 10-Q 1-3187 4(j)(3)
Indenture to Exhibit for the quarter ended September
4(e)(1), dated as of October 30, 2002
10, 2002
4(e)(4) -- Third Supplemental Indenture CenterPoint Houston's Form 10-Q 1-3187 4(j)(4)
to Exhibit 4(e)(1), dated as for the quarter ended September
of October 10, 2002 30, 2002
4(e)(5) -- Fourth Supplemental CenterPoint Houston's Form 10-Q 1-3187 4(j)(5)
Indenture to Exhibit for the quarter ended September
4(e)(1), dated as of October 30, 2002
10, 2002
4(e)(6) -- Fifth Supplemental Indenture CenterPoint Houston's Form 10-Q 1-3187 4(j)(6)
to Exhibit 4(e)(1), dated as for the quarter ended September
of October 10, 2002 30, 2002
4(e)(7) -- Sixth Supplemental Indenture CenterPoint Houston's Form 10-Q 1-3187 4(j)(7)
to Exhibit 4(e)(1), dated as for the quarter ended September
of October 10, 2002 30, 2002
4(e)(8) -- Seventh Supplemental Inden- CenterPoint Houston's Form 10-Q 1-3187 4(j)(8)
ture to Exhibit 4(e)(1), for the quarter ended September
dated as of October 10, 2002 30, 2002
4(e)(9) -- Eighth Supplemental CenterPoint Houston's Form 10-Q 1-3187 4(j)(9)
Indenture to Exhibit for the quarter ended September
4(e)(1), dated as of October 30, 2002
10, 2002
+4(e)(10) -- Officer's Certificates dated
October 10, 2002 setting
forth the form, terms and
provisions of the First
through Eighth Series of
General Mortgage Bonds
4(e)(11) -- Ninth Supplemental Indenture CenterPoint Energy's Form 10-K 1-31447 4(e)(10)
to Exhibit 4(e)(1), dated as for the year ended December 31,
of November 12, 2002 2002
+4(e)(12) -- Officer's Certificate dated
November 12, 2002 setting
forth the form, terms and
provisions of the Ninth
Series of General Mortgage
Bonds
4(e)(13) -- Tenth Supplemental Indenture CenterPoint Energy's Form 8-K 1-31447 4.1
to Exhibit 4(e)(1), dated as dated March 13, 2003
of March 18, 2003
4(e)(14) -- Officer's Certificate dated CenterPoint Energy's Form 8-K 1-31447 4.2
March 18, 2003 setting forth dated March 13, 2003
the form, terms and
provisions of the Tenth
Series and Eleventh Series
of General Mortgage Bonds
4(e)(15) -- Eleventh Supplemental Inden- CenterPoint Energy's Form 8-K 1-31447 4.1
ture to Exhibit 4(e)(1), dated May 16, 2003
dated as of May 23, 2003

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
4(k) -- Third Supplemental Indenture CenterPoint Energy's Form 8-K12B 1-31447 4(h)
dated as of August 31, 2002 dated August 31, 2002
among CenterPoint Energy,
REI, RERC and The Bank of
New York (supplementing the
Indenture dated as of June
15, 1996 under which RERC's
6.25% Convertible Junior
Subordinated Debentures were
issued)
4(l) -- Second Supplemental CenterPoint Energy's Form 8-K12B 1-31447 4(i)
Indenture dated as of August dated August 31, 2002
31, 2002 among CenterPoint
Energy, REI, RERC and
JPMorgan Chase Bank
(supplementing the Indenture
dated as of March 1, 1987
under which RERC's 6%
Convertible Subordinated De-
bentures due 2012 were
issued)
4(m) -- Assignment and Assumption CenterPoint Energy's Form 8-K12B 1-31447 4(j)
Agreement for the Guarantee dated August 31, 2002
Agreements dated as of Au-
gust 31, 2002 between
CenterPoint Energy and REI
(relating to (i) the
Guarantee Agreement dated as
of February 4, 1997 between
REI and The Bank of New York
providing for the guaranty
of certain amounts relating
to the 8.125% trust
preferred securities issued
by HL&P Capital Trust I and
(ii) the Guarantee Agreement
dated as of February 4, 1997
between REI and The Bank of
New York providing for the
guaranty of certain amounts
relating to the 8.257%
capital securities issued by
HL&P Capital Trust II)

149

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
4(n) -- Assignment and Assumption CenterPoint Energy's Form 8-K12B 1-311447 4(k)
Agreement for the Guarantee dated August 31, 2002
Agreement dated as of August
31, 2002 between CenterPoint
Energy and REI (relating to
the Guarantee Agreement
dated as of February 26,
1999 between REI and The
Bank of New York providing
for the guaranty of certain
amounts relating to the
7.20% Trust Originated
Preferred Securities issued
by REI Trust I)
4(o) -- Assignment and Assumption CenterPoint Energy's Form 8-K12B 1-31447 4(l)
Agreement for the Expense dated August 31, 2002
and Liability Agreements and
the Trust Agreements dated
as of August 31, 2002
between CenterPoint Energy
and REI (relating to the (i)
Agreement as to Expenses and
Liabilities dated as of June
4, 1997 between REI and HL&P
Capital Trust I, (ii)
Agreement as to Expenses and
Liabilities dated as of
February 4, 1997 between REI
and HL&P Capital Trust II,
(iii) HL&P Capital Trust I's
Amended and Restated Trust
Agreement dated February 4,
1997 and (iv) HL&P Capital
Trust II's Amended and
Restated Trust Agreement
dated February 4, 1997

Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, CenterPoint Energy
has not filed as exhibits to this Form 10-K certain long-term debt instruments,
including indentures, under which the total amount of securities authorized does
not exceed 10% of the total assets of CenterPoint Energy and its subsidiaries on
a consolidated basis. CenterPoint Energy hereby agrees to furnish a copy of any
such instrument to the SEC upon request.

*10(a)(1) -- Executive Benefit Plan of HI's Form 10-Q for the 1-7629 10(a)(1),
Houston Industries quarter ended March 31, 10(a)(2),
Incorporated ("HI") and 1987 and
First and Second 10(a)(3)
Amendments thereto
effective as of June 1,
1982, July 1, 1984, and
May 7, 1986, respectively
*10(a)(2) -- Third Amendment dated Sep- Reliant Energy's Form 10-K 1-3187 10(a)(2)
tember 17, 1999 to Ex- for the year ended Decem-
hibit 10(a)(1) ber 31, 2000
*10(a)(3) -- CenterPoint Energy CenterPoint Energy's Form 1-31447 10.4
Executive Benefits Plan, 10-Q for the quarter ended
as amended and restated September 30, 2003
effective June 18, 2003
*10(b)(1) -- Executive Incentive HI's Form 10-K for the 1-7629 10(b)
Compensation Plan of HI year ended December 31,
effective as of January 1, 1991
1982
*10(b)(2) -- First Amendment to Ex- HI's Form 10-Q for the 1 -7629 10(a)
hibit 10(b)(1) effective quarter ended March 31,
as of March 30, 1992 1992
*10(b)(3) -- Second Amendment to Ex- HI's Form 10-K for the 1-7629 10(b)
hibit 10(b)(1) effective year ended December 31,
as of November 4, 1992 1992
*10(b)(4) -- Third Amendment to Ex- HI's Form 10-K for the 1-7629 10(b)(4)
hibit 10(b)(1) effective year ended December 31,
as of September 7, 1994 1994
*10(b)(5) -- Fourth Amendment to Ex- HI's Form 10-K for the 1-3187 10(b)(5)
hibit 10(b)(1) effective year ended December 31,
as of August 6, 1997 1997
*10(c)(1) -- Executive Incentive HI's Form 10-Q for the 1-7629 10(b)(1)
Compensation Plan of HI quarter ended March 31,
effective as of January 1, 1987
1985
*10(c)(2) -- First Amendment to Ex- HI's Form 10-K for the 1-7629 10(b)(3)
hibit 10(c)(1) effective year ended December 31,
as of January 1, 1985 1988
*10(c)(3) -- Second Amendment to Ex- HI's Form 10-K for the 1-7629 10(c)(3)
hibit 10(c)(1) effective year ended December 31,
as of January 1, 1985 1991
*10(c)(4) -- Third Amendment to Ex- HI's Form 10-Q for the 1-7629 10(b)
hibit 10(c)(1) effective quarter ended March 31,
as of March 30, 1992 1992
*10(c)(5) -- Fourth Amendment to Ex- HI's Form 10-K for the 1-7629 10(c)(5)
hibit 10(c)(1) effective year ended December 31,
as of November 4, 1992 1992
*10(c)(6) -- Fifth Amendment to Ex- HI's Form 10-K for the 1-7629 10(c)(6)
hibit 10(c)(1) effective year ended December 31,
as of September 7, 1994 1994
*10(c)(7) -- Sixth Amendment to Ex- HI's Form 10-K for the 1-3187 10(c)(7)
hibit 10(c)(1) effective year ended December 31,
as of August 6, 1997 1997

151

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(d) -- Executive Incentive HI's Form 10-Q for the quarter 1-7629 10(b)(2)
Compensation Plan of HL&P ended March 31, 1987
effective as of January 1,
1985
*10(e)(1) -- Executive Incentive HI's Form 10-Q for the quarter 1-7629 10(b)
Compensation Plan of HI as ended June 30, 1989
amended and restated on
January 1, 1989
*10(e)(2) -- First Amendment to Ex- HI's Form 10-K for the year 1-7629 10(e)(2)
hibit 10(e)(1) effective ended December 31, 1991
as of January 1, 1989
*10(e)(3) -- Second Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(c)
hibit 10(e)(1) effective ended March 31, 1992
as of March 30, 1992
*10(e)(4) -- Third Amendment to Ex- HI's Form 10-K for the year 1-7629 10(c)(4)
hibit 10(e)(1) effective ended December 31, 1992
as of November 4, 1992
*10(e)(5) -- Fourth Amendment to Ex- HI's Form 10-K for the year 1 -7629 10(e)(5)
hibit 10(e)(1) effective ended December 31, 1994
as of September 7, 1994
*10(f)(1) -- Executive Incentive HI's Form 10-K for the year 1-7629 10(b)
Compensation Plan of HI as ended December 31, 1990
amended and restated on
January 1, 1991
*10(f)(2) -- First Amendment to Ex- HI's Form 10-K for the year 1-7629 10(f)(2)
hibit 10(f)(1) effective ended December 31, 1991
as of January 1, 1991
*10(f)(3) -- Second Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(d)
hibit 10(f)(1) effective ended March 31, 1992
as of March 30, 1992
*10(f)(4) -- Third Amendment to Ex- HI's Form 10-K for the year 1-7629 10(f)(4)
hibit 10(f)(1) effective ended December 31, 1992
as of November 4, 1992
*10(f)(5) -- Fourth Amendment to Ex- HI's Form 10-K for the year 1-7629 10(f)(5)
hibit 10(f)(1) effective ended December 31, 1992
as of January 1, 1993
*10(f)(6) -- Fifth Amendment to Ex- HI's Form 10-K for the year 1-7629 10(f)(6)
hibit 10(f)(1) effective ended December 31, 1994
in part, January 1, 1995,
and in part, September 7,
1994
*10(f)(7) -- Sixth Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(a)
hibit 10(f)(1) effective ended June 30, 1995
as of August 1, 1995
*10(f)(8) -- Seventh Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(a)
hibit 10(f)(1) effective ended June 30, 1996
as of January 1, 1996
*10(f)(9) -- Eighth Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(a)
hibit 10(f)(1) effective ended June 30, 1997
as of January 1, 1997

152

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(f)(10) -- Ninth Amendment to Ex- HI's Form 10-K for the year 1-3187 10(f)(10)
hibit 10(f)(1) effective ended December 31, 1997
in part, January 1, 1997,
and in part, January 1,
1998
*10(g) -- Benefit Restoration Plan HI's Form 10-Q for the quarter 1-7629 10(c)
of HI effective as of June ended March 31, 1987
1, 1985
*10(h) -- Benefit Restoration Plan HI's Form 10-K for the year 1-7629 10(g)(2)
of HI as amended and ended December 31, 1991
restated effective as of
January 1, 1988
*10(i)(1) -- Benefit Restoration Plan HI's Form 10-K for the year 1-7629 10(g)(3)
of HI, as amended and ended December 31, 1991
restated effective as of
July 1, 1991
*10(i)(2) -- First Amendment to Ex- HI's Form 10-K for the year 1-3187 10(i)(2)
hibit 10(i)(1) effective ended December 31, 1997
in part, August 6, 1997,
in part, September 3,
1997, and in part, October
1, 1997
*10(j)(1) -- Deferred Compensation Plan HI's Form 10-Q for the quarter 1-7629 10(d)
of HI effective as of ended March 31, 1987
September 1, 1985
*10(j)(2) -- First Amendment to Ex- HI's Form 10-K for the year 1-7629 10(d)(2)
hibit 10(j)(1) effective ended December 31, 1990
as of September 1, 1985
*10(j)(3) -- Second Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(e)
hibit 10(j)(1) effective ended March 31, 1992
as of March 30, 1992
*10(j)(4) -- Third Amendment to Ex- HI's Form 10-K for the year 1-7629 10(h)(4)
hibit 10(j)(1) effective ended December 31, 1993
as of June 2, 1993
*10(j)(5) -- Fourth Amendment to Ex- HI's Form 10-K for the year 1-7629 10(h)(5)
hibit 10(j)(1) effective ended December 31, 1994
as of September 7, 1994
*10(j)(6) -- Fifth Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(d)
hibit 10(j)(1) effective ended June 30, 1995
as of August 1, 1995
*10(j)(7) -- Sixth Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(b)
hibit 10(j)(1) effective ended June 30, 1995
as of December 1, 1995
*10(j)(8) -- Seventh Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(b)
hibit 10(j)(1) effective ended June 30, 1997
as of January 1, 1997
*10(j)(9) -- Eighth Amendment to Ex- HI's Form 10-K for the year 1-3187 10(j)(9)
hibit 10(j)(1) effective ended December 31, 1997
as of October 1, 1997
*10(j)(10) -- Ninth Amendment to Ex- HI's Form 10-K for the year 1-3187 10(j)(10)
hibit 10(j)(1) effective ended December 31, 1997
as of September 3, 1997

153

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(j)(11) -- Tenth Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(j)(11)
hibit 10(j)(1) effective for the year ended December 31,
as of January 1, 2001 2002
*10(j)(12) -- Eleventh Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(j)(12)
hibit 10(j)(1) effective for the year ended December 31,
as of August 31, 2002 2002
*10(j)(13) -- CenterPoint Energy 1985 CenterPoint Energy's Form 10-Q 1-31447 10.1
Deferred Compensation for the quarter ended September
Plan, as amended and 30, 2003
restated effective January
1, 2003
*10(k)(1) -- Deferred Compensation Plan HI's Form 10-Q for the quarter 1-7629 10(a)
of HI effective as of ended June 30, 1989
January 1, 1989
*10(k)(2) -- First Amendment to Ex- HI's Form 10-K for the year 1-7629 10(e)(3)
hibit 10(k)(1) effective ended December 31, 1989
as of January 1, 1989
*10(k)(3) -- Second Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(f)
hibit 10(k)(1) effective ended March 31, 1992
as of March 30, 1992
*10(k)(4) -- Third Amendment to Ex- HI's Form 10-K for the year 1-7629 10(i)(4)
hibit 10(k)(1) effective ended December 31, 1993
as of June 2, 1993
*10(k)(5) -- Fourth Amendment to Ex- HI's Form 10-K for the year 1-7629 10(i)(5)
hibit 10(k)(1) effective ended December 31, 1994
as of September 7, 1994
*10(k)(6) -- Fifth Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(c)
hibit 10(k)(1) effective ended June 30, 1995
as of August 1, 1995
*10(k)(7) -- Sixth Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(c)
hibit 10(k)(1) effective ended June 30, 1995
December 1, 1995
*10(k)(8) -- Seventh Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(c)
hibit 10(k)(1) effective ended June 30, 1997
as of January 1, 1997
*10(k)(9) -- Eighth Amendment to Ex- HI's Form 10-K for the year 1-3187 10(k)(9)
hibit 10(k)(1) effective ended December 31, 1997
in part October 1, 1997
and in part January 1,
1998
*10(k)(10) -- Ninth Amendment to Ex- HI's Form 10-K for the year 1-3187 10(k)(10)
hibit 10(k)(1) effective ended December 31, 1997
as of September 3, 1997
*10(k)(11) -- Tenth Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(k)(11)
hibit 10(k)(1) effective for the year ended December 31,
as of January 1, 2001 2002
*10(k)(12) -- Eleventh Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(k)(12)
hibit 10(k)(1) effective for the year ended December 31,
as of August 31, 2002 2002
*10(l)(1) -- Deferred Compensation Plan HI's Form 10-K for the year 1-7629 10(d)(3)
of HI effective as of ended December 31, 1990
January 1, 1991

154

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(l)(2) -- First Amendment to Ex- HI's Form 10-K for the year 1-7629 10(j)(2)
hibit 10(l)(1) effective ended December 31, 1991
as of January 1, 1991
*10(l)(3) -- Second Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(g)
hibit 10(l)(1) effective ended March 31, 1992
as of March 30, 1992
*10(l)(4) -- Third Amendment to Ex- HI's Form 10-K for the year 1-7629 10(j)(4)
hibit 10(l)(1) effective ended December 31, 1993
as of June 2, 1993
*10(l)(5) -- Fourth Amendment to Ex- HI's Form 10-K for the year 1-7629 10(j)(5)
hibit 10(l)(1) effective ended December 31, 1993
as of December 1, 1993
*10(l)(6) -- Fifth Amendment to Ex- HI's Form 10-K for the year 1-7629 10(j)(6)
hibit 10(l)(1) effective ended December 31, 1994
as of September 7, 1994
*10(l)(7) -- Sixth Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(b)
hibit 10(l)(1) effective ended June 30, 1995
as of August 1, 1995
*10(l)(8) -- Seventh Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(d)
hibit 10(l)(1) effective ended June 30, 1996
as of December 1, 1995
*10(l)(9) -- Eighth Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(d)
hibit 10(l)(1) effective ended June 30, 1997
as of January 1, 1997
*10(l)(10) -- Ninth Amendment to Ex- HI's Form 10-K for the year 1-3187 10(l)(10)
hibit 10(l)(1) effective ended December 31, 1997
in part August 6, 1997, in
part October 1, 1997, and
in part January 1, 1998
*10(l)(11) -- Tenth Amendment to Ex- HI's Form 10-K for the year 1-3187 10(i)(11)
hibit 10(l)(1) effective ended December 31, 1997
as of September 3, 1997
*10(l)(12) -- Eleventh Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(l)(12)
hibit 10(l)(1) effective for the year ended December 31,
as of January 1, 2001 2002
*10(l)(13) -- Twelfth Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(l)(13)
hibit 10(l)(1) effective for the year ended December 31,
as of August 31, 2002 2002
*10(m)(1) -- Long-Term Incentive Com- HI's Form 10-Q for the quarter 1-7629 10(c)
pensation Plan of HI ended June 30, 1989
effective as of January 1,
1989
*10(m)(2) -- First Amendment to Ex- HI's Form 10-K for the year 1-7629 10(f)(2)
hibit 10(m)(1) effective ended December 31, 1989
as of January 1, 1990
*10(m)(3) -- Second Amendment to Ex- HI's Form 10-K for the year 1-7629 10(k)(3)
hibit 10(m)(1) effective ended December 31, 1992
as of December 22, 1992

155

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(m)(4) -- Third Amendment to Ex- HI's Form 10-K for the year 1-3187 10(m)(4)
hibit 10(m)(1) effective ended December 31, 1997
as of August 6, 1997
*10(m)(5) -- Fourth Amendment to Ex- Reliant Energy's Form 10-Q for 1-3187 10.4
hibit 10(m)(1) effective the quarter ended June 30, 2002
as of January 1, 2001
*10(n) -- Form of stock option HI's Form 10-Q for the quarter 1-7629 10(h)
agreement for ended March 31, 1992
non-qualified stock
options granted under Ex-
hibit 10(m)(1)
*10(o) -- Forms of restricted stock HI's Form 10-Q for the quarter 1-7629 10(i)
agreement for restricted ended March 31, 1992
stock granted under Ex-
hibit 10(m)(1)
*10(p)(1) -- 1994 Long-Term Incentive HI's Form 10-K for the year 1-7629 10(n)(1)
Compensation Plan of HI ended December 31, 1993
effective as of January 1,
1994
*10(p)(2) -- Form of stock option HI's Form 10-K for the year 1-7629 10(n)(2)
agreement for ended December 31, 1993
non-qualified stock
options granted under Ex-
hibit 10(p)(1)
*10(p)(3) -- First Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10(e)
hibit 10(p)(1) effective ended June 30, 1997
as of May 9, 1997
*10(p)(4) -- Second Amendment to Ex- HI's Form 10-K for the year 1-3187 10(p)(4)
hibit 10(p)(1) effective ended December 31, 1997
as of August 6, 1997
*10(p)(5) -- Third Amendment to Ex- HI's Form 10-K for the year 1-3187 10(p)(5)
hibit 10(p)(1) effective ended December 31, 1998
as of January 1, 1998
*10(p)(6) -- Reliant Energy 1994 Long- Reliant Energy's Form 10-Q for 1-3187 10.6
Term Incentive the quarter ended June 30, 2002
Compensation Plan, as
amended and restated
effective January 1, 2001
*+10(p)(7) -- First Amendment to Ex-
hibit 10(p)(6), effective
December 1, 2003
*10(q)(1) -- Savings Restoration Plan HI's Form 10-K for the year 1-7629 10(f)
of HI effective as of ended December 31, 1990
January 1, 1991
*10(q)(2) -- First Amendment to Ex- HI's Form 10-K for the year 1-7629 10(l)(2)
hibit 10(q)(1) effective ended December 31, 1991
as of January 1, 1992
*10(q)(3) -- Second Amendment to Ex- HI's Form 10-K for the year 1-3187 10(q)(3)
hibit 10(q)(1) effective ended December 31, 1997
in part, August 6, 1997,
and in part, October 1,
1997

156

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(r)(1) -- Director Benefits Plan HI's Form 10-K for the year 1-7629 10(m)
effective as of January 1, ended December 31, 1991
1992
*10(r)(2) -- First Amendment to Ex- HI's Form 10-K for the year 1-7629 10(m)(1)
hibit 10(r)(1) effective ended December 31, 1998
as of August 6, 1997
*10(r)(3) -- CenterPoint Energy Outside CenterPoint Energy's Form 10-Q 1-31447 10.6
Director Benefits Plan, as for the quarter ended September
amended and restated 30, 2003
effective June 18, 2003
*10(s)(1) -- Executive Life Insurance HI's Form 10-K for the year 1-7629 10(q)
Plan of HI effective as of ended December 31, 1993
January 1, 1994
*10(s)(2) -- First Amendment to Ex- HI's Form 10-Q for the quarter 1-7629 10
hibit 10(s)(1) effective ended June 30, 1995
as of January 1, 1994
*10(s)(3) -- Second Amendment to Ex- HI's Form 10-K for the year 1-3187 10(s)(3)
hibit 10(s)(1) effective ended December 31, 1997
as of August 6, 1997
*10(s)(4) -- CenterPoint Energy CenterPoint Energy's Form 10-Q 1-31447 10.5
Executive Life Insurance for the quarter ended September
Plan, as amended and 30, 2003
restated effective June
18, 2003
*10(t) -- Employment and Supplemen- HI's Form 10-Q for the quarter 1-7629 10(f)
tal Benefits Agreement be- ended March 31, 1987
tween HL&P and Hugh Rice
Kelly
*10(u)(1) -- Reliant Energy Savings Reliant Energy's Form 10-K for 1-3187 10(cc)(1)
Plan, as amended and the year ended December 31, 1999
restated effective April
1, 1999
*10(u)(2) -- First Amendment to Ex- Reliant Energy's Form 10-Q for 1-3187 10.9
hibit 10(u)(1) effective the quarter ended June 30, 2002
January 1, 1999
*10(u)(3) -- Second Amendment to Ex- Reliant Energy's Form 10-Q for 1-3187 10.10
hibit 10(u)(1) effective the quarter ended June 30, 2002
January 1, 1997
*10(u)(4) -- Third Amendment to Ex- Reliant Energy's Form 10-Q for 1-3187 10.11
hibit 10(u)(1) effective the quarter ended June 30, 2002
January 1, 2001
*10(u)(5) -- Fourth Amendment to Ex- Reliant Energy's Form 10-Q for 1-3187 10.12
hibit 10(u)(1) effective the quarter ended June 30, 2002
May 6, 2002
*10(u)(6) -- Fifth Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(u)(6)
hibit 10(u)(1) effective for the year ended December 31,
January 1, 2002 and as 2002
renamed effective October
2, 2002

157

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
*10(u)(7) -- Reliant Energy Savings CenterPoint Energy's Form 10-K 1-31447 10(u)(7)
Trust between Reliant for the year ended December 31,
Energy and The Northern 2002
Trust Company, as Trustee,
as amended and restated
effective April 1, 1999
*10(u)(8) -- First Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(u)(8)
hibit 10(u)(7) effective for the year ended December 31,
September 30, 2002 2002
*+10(u)(9) -- Second Amendment to Ex-
hibit 10(u)(7) effective
January 6, 2003
10(u)(10) -- Note Purchase Agreement HI's Form 10-K for the year 1-7629 10(j)(3)
between HI and the ESOP ended December 31, 1990
Trustee, dated as of Octo-
ber 5, 1990
*10(u)(11) -- Reliant Energy Retirement CenterPoint Energy's Form 10-K 1-31447 10(u)(10)
Plan between Reliant for the year ended December 31,
Energy and The Northern 2002
Trust Company, as Trustee,
as amended and restated
effective January 1, 1999
*10(u)(12) -- First Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(u)(11)
hibit 10(u)(11) effective for the year ended December 31,
as of January 1, 1995 2002
*10(u)(13) -- Second Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(u)(12)
hibit 10(u)(11) effective for the year ended December 31,
as of January 1, 1995 2002
*10(u)(14) -- Third Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(u)(13)
hibit 10(u)(11) effective for the year ended December 31,
as of January 1, 2001 2002
*10(u)(15) -- Fourth Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(u)(14)
hibit 10(u)(11) effective for the year ended December 31,
as of January 1, 2001 2002
*10(u)(16) -- Fifth Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(u)(15)
hibit 10(u)(11) effective for the year ended December 31,
as of November 15, 2002, 2002
and as renamed effective
October 2, 2002
*10(u)(17) -- Sixth Amendment to Ex- CenterPoint Energy's Form 10-K 1-31447 10(u)(16)
hibit 10(u)(11) effective for the year ended December 31,
as of January 1, 2002 2002
*+10(u)(18) -- Seventh Amendment to Ex-
hibit 10(u)(11) effective
December 1, 2003

158

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------- ----------- -------------------------------- ------------ ---------
10(u)(19) -- Reliant Energy, Reliant Energy's Form 10-K for 1-3187 10(u)(3)
Incorporated Master the year ended December 31, 1999
Retirement Trust (as
amended and restated
effective January 1, 1999
and renamed effective May
5, 1999)
10(u)(20) -- Contribution and Reliant Energy's Form 10-K for 1-3187 10(u)(4)
Registration Agreement the year ended December 31, 2001
dated December 18, 2001
among the Company,
CenterPoint Energy, Inc.
and the Northern Trust
Company, trustee under the
Reliant Energy,
Incorporated Master
Retirement Trust
10(v)(1) -- Stockholder's Agreement Schedule 13-D dated July 6, 1995 5-19351 2
dated as of July 6, 1995
between the Company and
Time Warner Inc.
10(v)(2) -- Amendment to Exhibit HI's Form 10-K for the year 1-7629 10(x)(4)
10(v)(1) dated November ended December 31, 1996
18, 1996
*10(w)(1) -- Houston Industries HI's Form 10-K for the year 1-7629 10(7)
Incorporated Executive ended December 31, 1995
Deferred Compensation
Trust effective as of
December 19, 1995
*10(w)(2) -- First Amendment to Ex- HI's Form 10-Q for the quarter 1-3187 10
hibit 10(w)(1) effective ended June 30, 1998
as of August 6, 1997
*10(x) -- Supplemental compensation CenterPoint Energy's Form 10-K 1-31447 10(x)
agreement, dated Novem- for the year ended December 31,
ber 27, 2002, between 2002
CenterPoint Energy and
Milton Carroll
*10(y)(1) -- Reliant Energy, Reliant Energy's Form 10-K for 1-3187 10(y)
Incorporated and the year ended December 31, 2000
Subsidiaries Common Stock
Participation Plan for
Designated New Employees
and Non-Officer Employees
effective as of March 4,
1998
*10(y)(2) -- Reliant Energy, CenterPoint Energy's Form 10-K 1-31447 10(y)(2)
Incorporated and for the year ended December 31,
Subsidiaries Common Stock 2002
Participation Plan for
Designated New Employees
and Non-Officer Employees,
as amended and restated
effective January 1, 2001

I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated October 10, 2002, and Sections 105, 201, 301, 401(1) and 402(2)(A)
of the General Mortgage Indenture dated as of October 10, 2002, as heretofore
supplemented to the date hereof (as heretofore supplemented, the "Indenture"),
between the Company and JPMorgan Chase Bank, as Trustee (the "Trustee"). Terms
used herein and not otherwise defined herein shall have the meanings assigned to
them in the Indenture, unless the context clearly requires otherwise. Based upon
the foregoing, I hereby certify on behalf of the Company as follows:

1. The terms and conditions of the Securities of the series described in
this Officer's Certificate are as follows (the numbered subdivisions set forth
in this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):

(1) The Securities of the first series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series A, due
October 9, 2003" (the "Series A Bonds").

(2) The Series A Bonds shall be authenticated and delivered in the
aggregate principal amount of $850,000,000.

(3) Not applicable.

(4) The principal of all Series A Bonds shall be payable by the
Company in whole or in installments on such date or dates as the
Company has any obligations under the Credit Agreement, dated as of
October 10, 2002 (the "Credit Agreement"), among Citibank, N.A., as
syndication agent, JPMorgan Chase Bank, as administrative agent (the
"Administrative Agent") and the Banks from time to time parties
thereto, to repay any Loans (as defined in the Credit Agreement) to the
Banks (whether upon scheduled maturity, required prepayment,
acceleration, demand or otherwise), but not later than October 9, 2003.
The amount of principal of the Series A Bonds payable by the Company on
any such date shall equal the aggregate principal amount of the Loans
due and payable on such date pursuant to the Credit Agreement (but, in
no event, shall exceed the aggregate principal amount of the Series A
Bonds). The obligation of the Company to make any payment of the
principal on the Series A Bonds shall be fully or partially, as the
case may be, deemed to have been paid or otherwise satisfied and
discharged to the extent that the Company has paid the principal then
due and payable on the Loans made pursuant to the Credit Agreement.

(5) The Series A Bonds shall bear interest from the time
hereinafter provided at such rate per annum as shall cause the amount
of interest payable on each Interest Payment

Date (as hereinafter defined) on the Series A Bonds to equal the amount
of interest payable on such Interest Payment Date under the Credit
Agreement. Such interest on the Series A Bonds shall be payable on the
same dates as interest is payable from time to time pursuant to the
Credit Agreement (each such date herein called an "Interest Payment
Date"), until the maturity of the Series A Bonds, or, in the case of
any default by the Company in the payment of the principal due on the
Series A Bonds, until the Company's obligation with respect to the
payment of such principal shall be discharged as provided in the
Indenture. The amount of interest payable from time to time under the
Credit Agreement, the basis on which such interest is computed and the
dates on which such interest is payable are set forth in the Credit
Agreement. Each Series A Bond shall bear interest (a) from the date of
initial authentication of this Bond to but excluding the Interest
Payment Date next succeeding, and (b) from each Interest Payment Date
to but excluding the Interest Payment Date next succeeding. The
obligation of the Company to make any payment of interest on the Series
A Bonds shall be fully or partially, as the case may be, deemed to have
been paid or otherwise satisfied and discharged to the extent that the
Company has paid the interest on the Loans then due and payable
pursuant to the Credit Agreement.

(6) The Corporate Trust Office of JPMorgan Chase Bank in Houston,
Texas shall be the place at which (i) the principal of and interest on
the Series A Bonds shall be payable, (ii) registration of transfer of
the Series A Bonds may be effected, (iii) exchanges of the Series A
Bonds may be effected and (iv) notices and demands to or upon the
Company in respect of the Series A Bonds and the Indenture may be
served; and JPMorgan Chase Bank shall be the Security Registrar for the
Series A Bonds; provided, however, that the Company reserves the right
to change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves
the right to designate, by one or more Officer's Certificates, its
principal office in Houston, Texas as any such place or itself as the
Security Registrar; provided, however, that there shall be only a
single Security Registrar for the Series A Bonds. The principal of the
Series A Bonds shall be payable without the presentment or surrender
thereof.

(7) Not applicable.

(8) Not applicable.

(9) The Series A Bonds are issuable only in denominations of
$850,000,000.

(10) Not applicable.

(11) Not applicable.

(12) Not applicable.

(13) See subsection (4) above.

(14) Not applicable.

(15) Not applicable.

(16) Not applicable.

(17) The Series A Bonds shall be evidenced by a single registered
Series A Bond in the principal amount and denomination of Eight Hundred
Fifty Million Dollars ($850,000,000). The Series A Bonds shall be dated
October 10, 2002, shall mature no later than October 9, 2003, unless
sooner paid, and shall bear interest at the rate specified in
subsection (5) above. The Series A Bonds may be executed by the Company
and delivered to the Trustee for authentication and delivery. The
principal of and interest on the Series A Bonds shall be payable at the
Corporate Trust Office of the Trustee in Houston, Texas.

The single Series A Bond shall be identified by the number A-1 and
shall upon issuance be delivered by the Company to, and registered in
the name of, the Administrative Agent, on behalf of itself and the
Banks, and shall be transferable only as required to effect an
assignment thereof to a successor or an assign of the Administrative
Agent under the Credit Agreement and provided that all obligations of
the Administrative Agent under the Pledge Agreement (as defined below)
shall also be transferred to, and assumed by, any such successor or
assign. The Series A Bonds are to be issued to the Administrative Agent
as security for the payment by the Company of its Obligations (as
defined in the Pledge Agreement). The single Series A Bond shall be
held by the Administrative Agent subject to the terms of the Pledge
Agreement, dated as of October 10, 2002, between the Company and the
Administrative Agent (the "Pledge Agreement").

Series A Bonds issued upon transfer shall be numbered consecutively
from A-2 upwards and issued in the same $850,000,000 denomination but,
to the extent that the Loans are repaid, the registered holder thereof
shall duly note on the Series A Bonds like reduction in the amount of
principal in the Schedule of Prepayments to such Series A Bond and upon
any transfer of said Series A Bond, such Schedule of Prepayments shall
transfer to the subsequently issued Series A Bond. See also subsection
(19) below.

(18) Not applicable.

(19) The holder of the Series A Bond by acceptance of the Series A
Bond agrees to restrictions on transfer and to waivers of certain
rights of exchange as set forth herein. The Series A Bonds have not
been registered under the Securities Act of 1933 and may not be
offered, sold or otherwise transferred in the absence of such
registration or an applicable exemption therefrom. No service charge
shall be made for the registration of transfer or exchange of the
series A Bonds, or any Tranche thereof; provided, however, that the
Company may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection with the exchange or
transfer.

(20) For purposes of the Series A Bonds, "Business Day" shall mean
a day other than a Saturday, Sunday or other day on which commercial
banks in New York City are authorized or required by law to close.

(21) Not Applicable.

(22) The Trustee may conclusively presume that the obligation of
the Company to pay the principal of and interest on the Series A Bond
shall have been fully satisfied and discharged unless and until it
shall have received a written notice from the Administrative Agent,
signed by an authorized officer of the Administrative Agent and
attested by the Secretary or an Assistant Secretary of the
Administrative Agent within 90 days after the applicable Interest
Payment Date, stating that the payment of principal of or interest on
the Series A Bond has not been fully paid when due and specifying the
amount of funds required to make such payment.

The Series A Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.

2. The undersigned has read all of the covenants and conditions contained
in the Indenture, and the definitions in the Indenture relating thereto,
relating to the issuance of the Series A Bonds and in respect of compliance with
which this certificate is made.

3. The statements contained in this certificate are based upon the
familiarity of the undersigned with the Indenture, the documents accompanying
this certificate, and upon discussions by the undersigned with officers and
employees of the Company familiar with the matters set forth herein.

4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.

In the opinion of the undersigned, such conditions and covenants have
been complied with.

IN WITNESS WHEREOF, the undersigned has executed this Officer's
Certificate on this 10th day of October, 2002.

NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.

THIS BOND IS NOT TRANSFERABLE EXCEPT COLLATERAL TO A SUCCESSOR OR ASSIGN OF THE
ADMINISTRATIVE AGENT UNDER THE COLLATERAL AGREEMENT REFERRED TO HEREIN AMONG THE
COMPANY AND THE SEVERAL PARTIES THERETO.

This Security is not an Original Discount Security
within the meaning of the within-mentioned Indenture.

Principal Amount
$850,000,000 No. A-1

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a limited liability company duly
organized and existing under the laws of the State of Texas (herein called the
"Company," which term includes any successor under the Indenture referred to
below), for value received, hereby promises to pay to JPMorgan Chase Bank, as
Administrative Agent (the "Administrative Agent"), or its registered assigns, on
behalf of itself and the Banks (as defined below), the principal sum of EIGHT
HUNDRED FIFTY MILLION DOLLARS, or such lesser principal amount as shall be equal
to the aggregate principal amount of Loans (as defined in the Credit Agreement
defined below) outstanding from time to time under the Credit Agreement (as
defined below), in whole or in installments on such date or dates as the Company
has any obligations under the Credit Agreement to repay any Loans to the Banks
(whether upon scheduled maturity, required prepayment, acceleration, demand or
otherwise), but not later than the Stated Maturity specified above. The amount
of principal of this Bond payable by the Company on any such date shall equal
the aggregate principal amount of the Loans due and payable on such date
pursuant to the Credit Agreement (but, in no event, shall exceed the principal
amount of this Bond). The obligation of the Company to make any payment of the
principal on this Bond shall be fully or partially, as the case may be, deemed
to have been paid or otherwise satisfied and discharged to the extent that the
Company has paid the principal then due and payable on the Loans made pursuant
to the Credit Agreement.

Interest shall be payable on this Bond on each Interest Payment Date (as
hereinafter defined) at such rate per annum as shall cause the amount of
interest payable on such Interest Payment Date on this Bond to equal the amount
of interest payable on such Interest Payment Date under the Credit Agreement.
Such interest shall be payable on the same dates as interest is payable from
time to time in respect of the Loans pursuant to the Credit Agreement (each such
date herein called an "Interest Payment Date"), until the maturity of this Bond,
or, if the Company shall default in the payment of the principal due on this
Bond, until the Company's obligation with respect to the payment of such
principal shall be discharged as provided in the Indenture. The amount of
interest payable from time to time under the Credit Agreement, the basis on
which such interest is computed and the dates on which such interest is payable

are set forth in the Credit Agreement. This Bond shall bear interest (a) from
the date of initial authentication of this Bond to but excluding the Interest
Payment Date next succeeding, and (b) from each Interest Payment Date to but
excluding the Interest Payment Date next succeeding. The obligation of the
Company to make any payment of interest on this Bond shall be fully or
partially, as the case may be, deemed to have been paid or otherwise satisfied
and discharged to the extent that the Company has paid the interest on the Loans
then due and payable pursuant to the Credit Agreement.

This Bond is issued to the Administrative Agent by the Company pursuant to the
Company's obligations under the Credit Agreement, dated as of October 10, 2002
(as amended, supplemented, restated or otherwise modified from time to time, the
"Credit Agreement"), among the Company, Citibank, N.A., as Syndication Agent,
JPMorgan Chase Bank, as Administrative Agent, and the banks and other financial
institutions from time to time parties thereto (the "Banks"). This Bond shall be
held by the Administrative Agent subject to the terms of the Pledge Agreement,
dated as of October 10, 2002, between the Company, the Administrative Agent and
the Administrative Agent in such capacity under the Credit Agreement. Any
capitalized terms used herein and not defined herein shall have the meanings
specified in the Indenture (as defined below), unless otherwise noted.

The Administrative Agent shall surrender this Bond to the Trustee when all of
the principal of and interest on the Loans made pursuant to the Credit Agreement
shall have been duly paid and the Credit Agreement shall have been terminated.

Payments of the principal of and interest on this Bond shall be made at the
Corporate Trust Office of JPMorgan Chase Bank, as Trustee, located at 600 Travis
Street, Suite 1150, Houston, Texas 77002, or at such other office or agency as
may be designated for such purpose by the Company from time to time. Payment of
the principal of and interest on this Bond, as aforesaid, shall be made in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for the payment of public and private debts.

This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a description of the property mortgaged, pledged and held in
trust, the nature and extent of the security and the respective rights,
limitations of rights, duties and immunities of the Company, the Trustee and the
Holders of the Securities thereunder and of the terms and conditions upon which
the Securities are, and are to be, authenticated and delivered and secured. The
acceptance of this Bond shall be deemed to constitute the consent and agreement
by the Holder hereof to all of the terms and provisions of the Indenture. This
Bond is one of the series designated above.

The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.

If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and

PROVIDED, FURTHER, that the Indenture permits the Trustee to enter into one or
more supplemental indentures for limited purposes without the consent of any
Holders of Securities. The Indenture also contains provisions permitting the
Holders of a majority in principal amount of the Securities then Outstanding, on
behalf of the Holders of all Securities, to waive compliance by the Company with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Bond shall be conclusive and binding upon such Holder and upon all future
Holders of this Bond and of any Security issued upon the registration of
transfer hereof or in exchange therefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Bond.

As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Bond is registrable in the Security Register, upon
surrender of this Bond for registration of transfer at the Corporate Trust
Office of JPMorgan Chase Bank in Houston, Texas or such other office or agency
as may be designated by the Company from time to time, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Bonds of this
series of authorized denominations and of like tenor and aggregate principal
amount, will be issued to the designated transferee or transferees.

This Bond has been issued by the Company to the Administrative Agent for the
benefit of the holders of the Loans to (i) provide security for the payment of
the Company's obligations on the Loans under the Credit Agreement and (ii)
provide to the holders of such Loans the benefits of the security provided for
this Bond pursuant to the Indenture.

The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.

The Trustee may conclusively presume that the obligation of the Company to pay
the principal of and interest on this Bond shall have been fully satisfied and
discharged unless and until it shall have received a written notice from the
Administrative Agent, signed by an authorized officer of the Administrative
Agent and attested by the Secretary or an Assistant Secretary of the
Administrative Agent within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on this Bond has not been
fully paid when due and specifying the amount of funds required to make such
payment.

Before any transfer of this Bond by the registered holder or his or its legal
representative will be recognized or given effect by the Company or the Trustee,
the registered holder shall note the amounts of all reductions in the principal
of the Loans under the Credit Agreement, and shall notify the Company and the
Trustee of the name and address of the transferee and shall afford the Company
and the Trustee the opportunity of verifying the notation as to such reductions.
By acceptance hereof the holder of this Bond and each transferee shall be deemed
to have agreed to indemnify and hold harmless the Company and the Trustee
against all losses, claims, damages or liability arising out of any failure on
part of the holder or of any such transferee to comply with the requirements of
the preceding sentence.

No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.

This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.

Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any purpose.

[The remainder of this page is intentionally left blank.]

IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

By:

Name:

Title:

CERTIFICATE OF AUTHENTICATION

This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.

Date of Authentication: October 10, 2002

JPMORGAN CHASE BANK, as Trustee

By:

Authorized Signatory

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

OFFICER'S CERTIFICATE

October 10, 2002

I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated October 10, 2002, and Sections 105, 201, 301, 401(1) and 402(2)(A)
of the General Mortgage Indenture dated as of October 10, 2002, as heretofore
supplemented to the date hereof (as heretofore supplemented, the "Indenture"),
between the Company and JPMorgan Chase Bank, as Trustee (the "Trustee"). Terms
used herein and not otherwise defined herein shall have the meanings assigned to
them in the Indenture unless the context clearly requires otherwise. Based upon
the foregoing, I hereby certify on behalf of the Company as follows:

1. The terms and conditions of the Securities of the series described in
this Officer's Certificate are as follows (the numbered subdivisions set forth
in this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):

(1) The Securities of the second series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series B, due
November 1, 2018" (the "Series B Bonds").

(2) The Series B Bonds shall be initially authenticated and
delivered in the aggregate principal amount of $50,000,000.

(3) Not applicable.

(4) The Series B Bonds shall mature and the principal thereof
shall be due and payable together with all accrued and unpaid interest
thereon on November 1, 2018. The obligation of the Company to make any
payment of principal on this Bond shall be fully or partially, as the
case may be, deemed to have been paid or otherwise satisfied and
discharged to the extent CenterPoint Energy, Inc. ("CenterPoint") has
paid to the Trust Indenture Trustee the Installment Payment (as defined
below) in respect of the principal then due and payable on the Bonds
(as such term is defined in the Trust Indenture, and hereinafter
referred to as the "Series 1997 BR Bonds").

(5) The Series B Bonds shall bear interest from the time
hereinafter provided at such rate per annum as shall cause the amount
of interest payable on each Interest Payment Date (as hereinafter
defined) on the Series B Bonds to equal the amount of regularly
scheduled interest payable on such Interest Payment Date

1

under the Trust Indenture dated as of January 1, 1997 (as amended and
supplemented, the "Trust Indenture") between Brazos River Authority
(the "Issuer") and Bank One Trust Company, National Association
(successor to The First National Bank of Chicago), as trustee (the
"Trust Indenture Trustee") in respect of the Series 1997 BR Bonds. Such
interest on the Series B Bonds shall be payable on the same dates as
interest is payable from time to time in respect of the Series 1997 BR
Bonds pursuant to the Trust Indenture (each such date herein called an
"Interest Payment Date"), until the maturity of the Series B Bonds, or,
in the case of any default by the Company in the payment of the
principal due on the Series B Bonds, until the Company's obligation
with respect to the payment of such principal shall be discharged as
provided in the Indenture. The amount of interest payable from time to
time in respect of the Series 1997 BR Bonds under the Trust Indenture,
the basis on which such interest is computed and the dates on which
such interest is payable are set forth in the Trust Indenture. Each
Series B Bond shall bear interest from the later of the date of initial
authentication of such Series B Bond or the most recent Interest
Payment Date to which interest has been paid. The obligation of the
Company to make any payment of interest on the Series B Bonds shall be
fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent that CenterPoint has
paid to the Trust Indenture Trustee the Installment Payment in respect
of the interest then due and payable on the Series 1997 BR Bonds.

(6) The Corporate Trust Office of JPMorgan Chase Bank in Houston,
Texas, shall be the place at which (i) the principal of, premium and
interest on, the Series B Bonds shall be payable, (ii) registration of
transfer of the Series B Bonds may be effected, (iii) exchanges of the
Series B Bonds may be effected and (iv) notices and demands to or upon
the Company in respect of the Series B Bonds and the Indenture may be
served; and JPMorgan Chase Bank shall be the Security Registrar for the
Series B Bonds; provided, however, that the Company reserves the right
to change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves
the right to designate, by one or more Officer's Certificates, its
principal office in Houston, Texas as any such place or itself as the
Security Registrar; provided, however, that there shall be only a
single Security Registrar for the Series B Bonds.

(7) Not applicable.

2

(8) Not applicable.

(9) The Series B Bonds are issuable only in denominations of
$50,000,000.

(10) Not applicable.

(11) Not applicable.

(12) Not applicable.

(13) Not applicable.

(14) Not applicable.

(15) Not applicable

(16) Not applicable.

(17) The Series B Bonds shall be evidenced by a single registered
Series B Bond in the principal amount and denomination of Fifty Million
Dollars ($50,000,000). The Series B Bonds shall be dated October 10,
2002, shall mature no later than November 1, 2018, unless sooner paid,
and shall bear interest at the rate specified in subsection (5) above.
The Series B Bonds may be executed by the Company and delivered to the
Trustee for authentication and delivery. The principal of and interest
on the Bonds shall be payable at the Corporate Trust Office of the
Trustee in Houston, Texas.

The single Series B Bond shall be identified by the number B-1 and
shall upon issuance be delivered by the Company to, and registered in
the name of, the Trust Indenture Trustee, and shall be transferable
only as required to effect an assignment thereof to a successor or an
assign of the Trust Indenture Trustee under the Trust Indenture, and
provided that all obligations of the Trust Indenture Trustee under the
Collateral Agreement (as defined herein) shall also be transferred to,
and assumed by, any such successor or assign. The Series B Bonds are to
be issued to the Trust Indenture Trustee as security for the payment by
CenterPoint of the Installment Payments, as defined in, and pursuant to
the Installment Payment and Bond Amortization Agreement, dated as of
January 1, 1997, by and between the Issuer and CenterPoint (as
successor). The single Series B Bond shall be held by the Trust
Indenture Trustee subject to the terms of the Series B Bonds Collateral
Agreement (Series B Bonds), dated as of October 10, 2002, between the
Company and the Trust Indenture Trustee (the "Collateral Agreement").

Series B Bonds issued upon transfer shall be numbered consecutively
from B-2 upwards and issued in the same $50,000,000 denomination. See
also subsection (19) below.

(18) Not applicable.

(19) The holder of the Series B Bond by acceptance of the Series B
Bond agrees to restrictions on transfer and to waivers of certain
rights of exchange as set forth herein. The Series B Bonds have not
been registered under the Securities Act of 1933 and may

3

not be offered, sold or otherwise transferred in the absence of such
registration or an applicable exemption therefrom. No service charge
shall be made for the registration of transfer or exchange of the
Series B Bonds, or any Tranche thereof; provided, however, that the
Company may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection with the exchange or
transfer.

(20) For purposes of the Series B Bonds, "Business Day" means any
day other than (i) a Saturday or Sunday, (ii) a day on which commercial
banks in New York, New York, Houston, Texas, or the city in which the
principal corporate trust office of the Indenture Trustee is located,
are authorized by law to close or (iii) a day on which the New York
Stock Exchange is closed.

(21) Not applicable.

(22) The Trustee may conclusively presume that the obligation of
the Company to pay the principal of and interest on the Series B Bond
shall have been fully satisfied and discharged unless and until it
shall have received a written notice from the Indenture Trustee, signed
by an authorized officer of the Indenture Trustee and attested by the
Secretary or an Assistant Secretary of the Indenture Trustee within 90
days after the applicable Interest Payment Date, stating that the
payment of principal of or interest on the Series B Bond has not been
fully paid when due and specifying the amount of funds required to make
such payment.

The Series B Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.

2. The undersigned has read all of the covenants and conditions contained
in the Indenture, and the definitions in the Indenture relating thereto,
relating to the issuance of the Series B Bonds and in respect of compliance with
which this certificate is made.

3. The statements contained in this certificate are based upon the
familiarity of the undersigned with the Indenture, the documents accompanying
this certificate, and upon discussions by the undersigned with officers and
employees of the Company familiar with the matters set forth herein.

4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.

In the opinion of the undersigned, such conditions and covenants have
been complied with.

4

IN WITNESS WHEREOF, the undersigned has executed this Officer's Certificate on
this 10th day of October, 2002.

NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.

THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUST INDENTURE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO
HEREIN AMONG THE ISSUER AND THE TRUST INDENTURE TRUSTEE.

This Security is not an Original Discount Security
within the meaning of the within-mentioned Indenture.

Principal Amount
$50,000,000 No. B-1

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to Bank One Trust Company, National
Association as Trustee under the Trust Indenture (as herein defined) or its
registered assigns (the "Indenture Trustee"), the principal sum of FIFTY MILLION
DOLLARS, in whole or in installments on such date or dates as the Issuer (as
defined herein) has any obligations under the Trust Indenture (as amended and
supplemented, the "Trust Indenture"), dated as of January 1, 1997, between
Brazos River Authority (the "Issuer") and the Indenture Trustee (as successor)
to repay any principal in respect of the Bonds (as such term is defined in the
Trust Indenture, and hereinafter referred to as the "Series 1997 BR Bonds"),
excluding any payment of principal in advance of the final scheduled maturity
date thereof, but not later than the Stated Maturity specified above. The
obligation of the Company to make any payment of principal on this Bond, whether
at maturity or otherwise, shall be fully or partially, as the case may be,
deemed to have been paid or otherwise satisfied and discharged to the extent
CenterPoint Energy, Inc. ("CenterPoint") has paid to the Indenture Trustee the
Installment Payment (as defined below) in respect of the principal then due and
payable on the Series 1997 BR Bonds.

Interest shall be payable on this Bond on each Interest Payment Date (as
hereinafter defined) at such rate per annum as shall cause the amount of
interest payable on such Interest Payment Date on this Bond to equal the amount
of regularly scheduled interest payable on such Interest Payment Date in respect
of the Series 1997 BR Bonds under the Trust Indenture. Such interest shall be
payable on the same dates as interest is payable from time to time in respect of
the Series 1997 BR Bonds pursuant to the Trust Indenture (each such date herein
called an "Interest Payment Date"), until the maturity of this Bond, or, if the
Company shall default in the payment of the principal due on this Bond, until
the Company's obligation with respect to the payment of such principal shall be
discharged as provided in the Indenture. The amount of interest payable from
time to time in respect of the Series 1997 BR Bonds under the Trust Indenture,
the basis on which such interest is computed and the dates on which such
interest is

payable are set forth in the Trust Indenture. This Bond shall bear interest (a)
from the Interest Payment Date next preceding the date of this Bond to which
interest has been paid, or (b) if the date of this Bond is an Interest Payment
Date to which interest has been paid, then from such date, or (c) if no interest
has been paid on this Bond, then from the date of initial authentication of this
Bond. The obligation of the Company to make any payment of interest on this Bond
shall be fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent that CenterPoint has paid to
the Indenture Trustee the Installment Payment in respect of the interest then
due and payable on the Series 1997 BR Bonds.

This Bond is issued to the Trust Indenture Trustee as security for the payment
by CenterPoint of the Installment Payments, as defined in, and pursuant to the
Installment Payment and Bond Amortization Agreement, dated as of January 1,
1997, between the Brazos River Authority and CenterPoint (as successor). This
Bond shall be held by the Trust Indenture Trustee subject to the terms of the
Collateral Agreement (Series B Bonds), dated as of October 10, 2002, between the
Company and the Indenture Trustee. Any capitalized terms used herein and not
defined herein shall have the meanings specified in the Indenture (as defined
below), unless otherwise noted.

The Indenture Trustee shall surrender this Bond to the Trustee when all of the
principal of and interest on the Series 1997 BR Bonds shall have been duly paid,
and the Trust Indenture shall have been terminated.

Payments of the principal of and interest on this Bond shall be made at the
Corporate Trust Office of JPMorgan Chase Bank, as Trustee, located at 600 Travis
Street, Suite 1150, Houston, Texas 77002, or at such other office or agency as
may be designated for such purpose by the Company from time to time. Payment of
the principal of and interest on this Bond, as aforesaid, shall be made in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for the payment of public and private debts.

This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a description of the property mortgaged, pledged and held in
trust, the nature and extent of the security and the respective rights,
limitations of rights, duties and immunities of the Company, the Trustee and the
Holders of the Securities thereunder and of the terms and conditions upon which
the Securities are, and are to be, authenticated and delivered and secured. The
acceptance of this Bond shall be deemed to constitute the consent and agreement
by the Holder hereof to all of the terms and provisions of the Indenture. This
Bond is one of the series designated above.

The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.

If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions

permitting the Holders of a majority in principal amount of the Securities then
Outstanding, on behalf of the Holders of all Securities, to waive compliance by
the Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Bond shall be conclusive and binding upon such Holder and upon
all future Holders of this Bond and of any Security issued upon the registration
of transfer hereof or in exchange therefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Bond.

As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Bond is registrable in the Security Register, upon
surrender of this Bond for registration of transfer at the Corporate Trust
Office of JPMorgan Chase Bank in Houston, Texas or such other office or agency
as may be designated by the Company from time to time, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Bonds of this
series of authorized denominations and of like tenor and aggregate principal
amount, will be issued to the designated transferee or transferees.

The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.

The Trustee may conclusively presume that the obligation of the Company to pay
the principal of and interest on this Bond shall have been fully satisfied and
discharged unless and until it shall have received a written notice from the
Trust Indenture Trustee, signed by an authorized officer of the Trust Indenture
Trustee and attested by the Secretary or an Assistant Secretary of the Trust
Indenture Trustee within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on this Bond has not been
fully paid when due and specifying the amount of funds required to make such
payment.

Before any transfer of this Bond by the registered holder or his or its legal
representative will be recognized or given effect by the Company or the Trustee,
the registered holder shall notify the Company and the Trustee of the name and
address of the transferee. By acceptance hereof the holder of this Bond and each
transferee shall be deemed to have agreed to indemnify and hold harmless the
Company and the Trustee against all losses, claims, damages or liability arising
out of any failure on part of the holder or of any such transferee to comply
with the requirements of the preceding sentence.

No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.

This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.

Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any

purpose.

[The remainder of this page is intentionally left blank.]

IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

By: _____________________________________

Name:

Title:

CERTIFICATE OF AUTHENTICATION

This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.

Date of Authentication: ______, 2002

JPMORGAN CHASE BANK, as Trustee

By: _____________________________________

Authorized Signatory

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

OFFICER'S CERTIFICATE

October 10, 2002

I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated October 10, 2002, and Sections 105, 201, 301, 401(1) and 402(2)(A)
of the General Mortgage Indenture dated as of October 10, 2002, as heretofore
supplemented to the date hereof (as heretofore supplemented, the "Indenture"),
between the Company and JPMorgan Chase Bank, as Trustee (the "Trustee"). Terms
used herein and not otherwise defined herein shall have the meanings assigned to
them in the Indenture unless the context clearly requires otherwise. Based upon
the foregoing, I hereby certify on behalf of the Company as follows:

1. The terms and conditions of the Securities of the series described in
this Officer's Certificate are as follows (the numbered subdivisions set forth
in this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):

(1) The Securities of the third series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series C, due
November 1, 2028" (the "Series C Bonds").

(2) The Series C Bonds shall be initially authenticated and
delivered in the aggregate principal amount of $68,000,000.

(3) Not applicable.

(4) The Series C Bonds shall mature and the principal thereof
shall be due and payable together with all accrued and unpaid interest
thereon on November 1, 2028. The obligation of the Company to make any
payment of principal on this Bond shall be fully or partially, as the
case may be, deemed to have been paid or otherwise satisfied and
discharged to the extent CenterPoint Energy, Inc. ("CenterPoint") has
paid to the Trust Indenture Trustee the Installment Payment (as defined
below) in respect of the principal then due and payable on the Bonds
(as such term is defined in the Trust Indenture, and hereinafter
referred to as the "Series 1997 MC Bonds").

(5) The Series C Bonds shall bear interest from the time
hereinafter provided at such rate per annum as shall cause the amount
of interest payable on each Interest Payment Date (as hereinafter
defined) on the Series C Bonds to equal the amount of regularly
scheduled interest payable on such Interest Payment Date under the
Trust Indenture dated as of January 1, 1997 (as amended and
supplemented, the "Trust Indenture") between Matagorda County
Navigation District Number One (the "Issuer") and Bank One Trust
Company, National Association (successor to The First National Bank of
Chicago), as trustee (the "Trust Indenture Trustee") in respect of the
Series 1997 MC Bonds. Such

1

interest on the Series C Bonds shall be payable on the same dates as
interest is payable from time to time in respect of the Series 1997 PC
Bonds pursuant to the Trust Indenture (each such date herein called an
"Interest Payment Date"), until the maturity of the Series C Bonds, or,
in the case of any default by the Company in the payment of the
principal due on the Series C Bonds, until the Company's obligation
with respect to the payment of such principal shall be discharged as
provided in the Indenture. The amount of interest payable from time to
time in respect of the Series 1997 MC Bonds under the Trust Indenture,
the basis on which such interest is computed and the dates on which
such interest is payable are set forth in the Trust Indenture. Each
Series C Bond shall bear interest from the later of the date of initial
authentication of such Series C Bond or the most recent Interest
Payment Date to which interest has been paid. The obligation of the
Company to make any payment of interest on the Series C Bonds shall be
fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent that CenterPoint has
paid to the Trustee the Installment Payment in respect of the interest
then due and payable on the Series 1997 MC Bonds.

(6) The Corporate Trust Office of JPMorgan Chase Bank in Houston,
Texas shall be the place at which (i) the principal of, premium and
interest on, the Series C Bonds shall be payable, (ii) registration of
transfer of the Series C Bonds may be effected, (iii) exchanges of the
Series C Bonds may be effected and (iv) notices and demands to or upon
the Company in respect of the Series C Bonds and the Indenture may be
served; and JPMorgan Chase Bank shall be the Security Registrar for the
Series C Bonds; provided, however, that the Company reserves the right
to change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves
the right to designate, by one or more Officer's Certificates, its
principal office in Houston, Texas as any such place or itself as the
Security Registrar; provided, however, that there shall be only a
single Security Registrar for the Series C Bonds.

(7) Not applicable.

(8) Not applicable.

(9) The Series C Bonds are issuable only in denominations of
$68,000,000.

(10) Not applicable.

(11) Not applicable.

(12) Not applicable.

(13) Not applicable.

(14) Not applicable.

(15) Not applicable.

(16) Not applicable.

2

(17) The Series C Bonds shall be evidenced by a single registered
Series C Bond in the principal amount and denomination of Sixty-Eight
Million Dollars ($68,000,000). The Series C Bonds shall be dated
October 10, 2002, shall mature no later than November 1, 2028, unless
sooner paid, and shall bear interest at the rate specified in
subsection (5) above. The Series C Bonds may be executed by the Company
and delivered to the Trustee for authentication and delivery. The
principal of and interest on the Bonds shall be payable at the
Corporate Trust Office of the Trustee in Houston, Texas.

The single Series C Bond shall be identified by the number C-1 and
shall upon issuance be delivered by the Company to, and registered in
the name of, the Trust Indenture Trustee, and shall be transferable
only as required to effect an assignment thereof to a successor or an
assign of the Trust Indenture Trustee under the Trust Indenture, and
provided that all obligations of the Trust Indenture Trustee under the
Collateral Agreement (as defined herein) shall also be transferred to,
and assumed by, any such successor or assign. The Series C Bonds are to
be issued to the Trust Indenture Trustee as security for the payment by
CenterPoint of the Installment Payments, as defined in, and pursuant to
the Installment Payment and Bond Amortization Agreement, dated as of
January 1, 1997, by and between the Issuer and CenterPoint (as
successor). The single Series C Bond shall be held by the Trust
Indenture Trustee subject to the terms of the Series C Bonds Collateral
Agreement (Series B Bonds), dated as of October 10, 2002, between the
Company and the Trust Indenture Trustee (the "Collateral Agreement").

Series C Bonds issued upon transfer shall be numbered consecutively
from C-2 upwards and issued in the same $68,000,000 denomination. See
also subsection (19) below.

(18) Not applicable.

(19) The holder of the Series C Bond by acceptance of the Series C
Bond agrees to restrictions on transfer and to waivers of certain
rights of exchange as set forth herein. The Series C Bonds have not
been registered under the Securities Act of 1933 and may not be
offered, sold or otherwise transferred in the absence of such
registration or an applicable exemption therefrom. No service charge
shall be made for the registration of transfer or exchange of the
Series C Bonds, or any Tranche thereof; provided, however, that the
Company may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection with the exchange or
transfer.

(20) For purposes of the Series C Bonds, "Business Day" means any
day other than (i) a Saturday or Sunday, (ii) a day on which commercial
banks in New York, New York, Houston, Texas, or the city in which the
principal corporate trust office of the Indenture Trustee is located,
are authorized by law to close or (iii) a day on which the New York
Stock Exchange is closed.

(21) Not applicable.

(22) The Trustee may conclusively presume that the obligation of
the Company to pay the principal of and interest on the Series C Bond
shall have been fully satisfied and discharged unless and until it
shall have received a written notice from the Indenture

3

Trustee, signed by an authorized officer of the Indenture Trustee and
attested by the Secretary or an Assistant Secretary of the Indenture
Trustee within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on the Series C
Bond has not been fully paid when due and specifying the amount of
funds required to make such payment.

The Series C Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.

2. The undersigned has read all of the covenants and conditions contained
in the Indenture, and the definitions in the Indenture relating thereto,
relating to the issuance of the Series C Bonds and in respect of compliance with
which this certificate is made.

3. The statements contained in this certificate are based upon the
familiarity of the undersigned with the Indenture, the documents accompanying
this certificate, and upon discussions by the undersigned with officers and
employees of the Company familiar with the matters set forth herein.

4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.

In the opinion of the undersigned, such conditions and covenants have
been complied with.

4

IN WITNESS WHEREOF, the undersigned has executed this
Officer's Certificate on this 10th day of October, 2002.

NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.

THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUST INDENTURE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO
HEREIN AMONG THE ISSUER AND THE TRUST INDENTURE TRUSTEE.

This Security is not an Original Discount Security
within the meaning of the within-mentioned Indenture.

Principal Amount
$68,000,000 No. C-1

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to Bank One Trust Company, National
Association as Trustee under the Trust Indenture (as herein defined) or its
registered assigns (the "Indenture Trustee"), the principal sum of SIXTY EIGHT
MILLION DOLLARS, in whole or in installments on such date or dates as the Issuer
(as defined herein) has any obligations under the Trust Indenture (as amended
and supplemented, the "Trust Indenture"), dated as of January 1, 1997, between
Matagorda County Navigation District Number One (the "Issuer") and the Indenture
Trustee (as successor) to repay any principal in respect of the Bonds (as such
term is defined in the Trust Indenture, and hereinafter referred to as the
"Series 1997 MC Bonds"), excluding any payment of principal in advance of the
final scheduled maturity date thereof, but not later than the Stated Maturity
specified above. The obligation of the Company to make any payment of principal
on this Bond, whether at maturity or otherwise, shall be fully or partially, as
the case may be, deemed to have been paid or otherwise satisfied and discharged
to the extent CenterPoint Energy, Inc. ("CenterPoint") has paid to the Indenture
Trustee the Installment Payment (as defined below) in respect of the principal
then due and payable on the Series 1997 MC Bonds.

Interest shall be payable on this Bond on each Interest Payment Date (as
hereinafter defined) at such rate per annum as shall cause the amount of
interest payable on such Interest Payment Date on this Bond to equal the amount
of regularly scheduled interest payable on such Interest Payment Date in respect
of the Series 1997 MC Bonds under the Trust Indenture. Such interest shall be
payable on the same dates as interest is payable from time to time in respect of
the Series 1997 MC Bonds pursuant to the Trust Indenture (each such date herein
called an "Interest Payment Date"), until the maturity of this Bond, or, if the
Company shall default in the payment of the principal due on this Bond, until
the Company's obligation with respect to the payment of such principal shall be
discharged as

1

provided in the Indenture. The amount of interest payable from time to time in
respect of the Series 1997 MC Bonds under the Trust Indenture, the basis on
which such interest is computed and the dates on which such interest is payable
are set forth in the Trust Indenture. This Bond shall bear interest (a) from the
Interest Payment Date next preceding the date of this Bond to which interest has
been paid, or (b) if the date of this Bond is an Interest Payment Date to which
interest has been paid, then from such date, or (c) if no interest has been paid
on this Bond, then from the date of initial authentication of this Bond. The
obligation of the Company to make any payment of interest on this Bond shall be
fully or partially, as the case may be, deemed to have been paid or otherwise
satisfied and discharged to the extent that CenterPoint has paid to the
Indenture Trustee the Installment Payment in respect of the interest then due
and payable on the Series 1997 MC Bonds.

This Bond is issued to the Trust Indenture Trustee as security for the payment
by CenterPoint of the Installment Payments, as defined in, and pursuant to the
Installment Payment and Bond Amortization Agreement, dated as of January 1,
1997, between Matagorda County Navigation District Number One and CenterPoint
(as successor). This Bond shall be held by the Indenture Trustee subject to the
terms of the Collateral Agreement (Series C Bonds), dated as of October 10,
2002, between the Company and the Trust Indenture Trustee. Any capitalized terms
used herein and not defined herein shall have the meanings specified in the
Indenture (as defined below), unless otherwise noted.

The Indenture Trustee shall surrender this Bond to the Trustee when all of the
principal of and interest on the Series 1997 MC Bonds shall have been duly paid,
and the Trust Indenture shall have been terminated.

Payments of the principal of and interest on this Bond shall be made at the
Corporate Trust Office of JPMorgan Chase Bank, as Trustee, located at 600 Travis
Street, Suite 1150, Houston, Texas 77002, or at such other office or agency as
may be designated for such purpose by the Company from time to time. Payment of
the principal of and interest on this Bond, as aforesaid, shall be made in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for the payment of public and private debts.

This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a description of the property mortgaged, pledged and held in
trust, the nature and extent of the security and the respective rights,
limitations of rights, duties and immunities of the Company, the Trustee and the
Holders of the Securities thereunder and of the terms and conditions upon which
the Securities are, and are to be, authenticated and delivered and secured. The
acceptance of this Bond shall be deemed to constitute the consent and agreement
by the Holder hereof to all of the terms and provisions of the Indenture. This
Bond is one of the series designated above.

The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.

If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and

2

PROVIDED, FURTHER, that the Indenture permits the Trustee to enter into one or
more supplemental indentures for limited purposes without the consent of any
Holders of Securities. The Indenture also contains provisions permitting the
Holders of a majority in principal amount of the Securities then Outstanding, on
behalf of the Holders of all Securities, to waive compliance by the Company with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Bond shall be conclusive and binding upon such Holder and upon all future
Holders of this Bond and of any Security issued upon the registration of
transfer hereof or in exchange therefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Bond.

As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Bond is registrable in the Security Register, upon
surrender of this Bond for registration of transfer at the Corporate Trust
Office of JPMorgan Chase Bank in Houston, Texas or such other office or agency
as may be designated by the Company from time to time, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Bonds of this
series of authorized denominations and of like tenor and aggregate principal
amount, will be issued to the designated transferee or transferees.

The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.

The Trustee may conclusively presume that the obligation of the Company to pay
the principal of and interest on this Bond shall have been fully satisfied and
discharged unless and until it shall have received a written notice from the
Trust Indenture Trustee, signed by an authorized officer of the Trust Indenture
Trustee and attested by the Secretary or an Assistant Secretary of the Trust
Indenture Trustee within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on this Bond has not been
fully paid when due and specifying the amount of funds required to make such
payment.

Before any transfer of this Bond by the registered holder or his or its legal
representative will be recognized or given effect by the Company or the Trustee,
the registered holder shall notify the Company and the Trustee of the name and
address of the transferee. By acceptance hereof the holder of this Bond and each
transferee shall be deemed to have agreed to indemnify and hold harmless the
Company and the Trustee against all losses, claims, damages or liability arising
out of any failure on part of the holder or of any such transferee to comply
with the requirements of the preceding sentence.

No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.

This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.

3

Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any purpose.

[The remainder of this page is intentionally left blank.]

4

IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

By: _____________________________________

Name:

Title:

CERTIFICATE OF AUTHENTICATION

This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.

Date of Authentication: ______, 2002

JPMORGAN CHASE BANK, as Trustee

By: _____________________________________

Authorized Signatory

5

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

OFFICER'S CERTIFICATE

October 10, 2002

I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated October 10, 2002, and Sections 105, 201, 301, 401(1) and 402(2)(A)
of the General Mortgage Indenture dated as of October 10, 2002, as heretofore
supplemented to the date hereof (as heretofore supplemented, the "Indenture"),
between the Company and JPMorgan Chase Bank, as Trustee (the "Trustee"). Terms
used herein and not otherwise defined herein shall have the meanings assigned to
them in the Indenture unless the context clearly requires otherwise. Based upon
the foregoing, I hereby certify on behalf of the Company as follows:

1. The terms and conditions of the Securities of the series described in
this Officer's Certificate are as follows (the numbered subdivisions set forth
in this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):

(1) The Securities of the fourth series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series D, due
May 1, 2019" (the "Series D Bonds").

(2) The Series D Bonds shall be initially authenticated and
delivered in the aggregate principal amount of $100,000,000.

(3) Not applicable.

(4) The Series D Bonds shall mature and the principal thereof
shall be due and payable together with all accrued and unpaid interest
thereon on May 1, 2019. The obligation of the Company to make any
payment of principal on this Bond shall be fully or partially, as the
case may be, deemed to have been paid or otherwise satisfied and
discharged to the extent CenterPoint Energy, Inc. ("CenterPoint") has
paid to the Trust Indenture Trustee the Installment Payment (as defined
below) in respect of the principal then due and payable on the Bonds
(as such term is defined in the Trust Indenture, and hereinafter
referred to as the "Series 1998A BR Bonds").

(5) The Series D Bonds shall bear interest from the time
hereinafter provided at such rate per annum as shall cause the amount
of interest payable on each Interest Payment Date (as hereinafter
defined) on the Series D Bonds to equal the amount of regularly
scheduled interest payable on such Interest Payment Date under the
Trust Indenture dated as of February 1, 1998 (as amended and
supplemented, the "Trust Indenture") between Brazos River Authority
(the "Issuer") and JPMorgan Chase Bank (successor to Chase Bank of
Texas, National Association, as trustee (the "Trust Indenture Trustee")
in respect of the Series 1998A BR Bonds. Such interest on the Series D
Bonds shall be payable on

1

the same dates as interest is payable from time to time in respect of
the Series 1998A BR Bonds pursuant to the Trust Indenture (each such
date herein called an "Interest Payment Date"), until the maturity of
the Series D Bonds, or, in the case of any default by the Company in
the payment of the principal due on the Series D Bonds, until the
Company's obligation with respect to the payment of such principal
shall be discharged as provided in the Indenture. The amount of
interest payable from time to time in respect of the Series 1998A BR
Bonds under the Trust Indenture, the basis on which such interest is
computed and the dates on which such interest is payable are set forth
in the Trust Indenture. Each Series D Bond shall bear interest from the
later of the date of initial authentication of such Series D Bond or
the most recent Interest Payment Date to which interest has been paid.
The obligation of the Company to make any payment of interest on the
Series D Bonds shall be fully or partially, as the case may be, deemed
to have been paid or otherwise satisfied and discharged to the extent
that CenterPoint has paid to the Trust Indenture Trustee the
Installment Payment in respect of the interest then due and payable on
the Series 1998A BR Bonds.

(6) The Corporate Trust Office of JPMorgan Chase Bank in Houston,
Texas shall be the place at which (i) the principal of, premium and
interest on, the Series D Bonds shall be payable, (ii) registration of
transfer of the Series D Bonds may be effected, (iii) exchanges of the
Series D Bonds may be effected and (iv) notices and demands to or upon
the Company in respect of the Series D Bonds and the Indenture may be
served; and JPMorgan Chase Bank shall be the Security Registrar for the
Series D Bonds; provided, however, that the Company reserves the right
to change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves
the right to designate, by one or more Officer's Certificates, its
principal office in Houston, Texas as any such place or itself as the
Security Registrar; provided, however, that there shall be only a
single Security Registrar for the Series D Bonds.

(7) Not applicable.

(8) Not applicable.

(9) The Series D Bonds are issuable only in denominations of
$100,000,000.

(10) Not applicable.

(11) Not applicable.

(12) Not applicable.

(13) Not applicable.

(14) Not applicable.

(15) Not applicable.

(16) Not applicable.

2

(17) The Series D Bonds shall be evidenced by a single registered
Series D Bond in the principal amount and denomination of One Hundred
Million Dollars ($100,000,000). The Series D Bonds shall be dated
October 10, 2002, shall mature no later than May 1, 2019, unless sooner
paid, and shall bear interest at the rate specified in subsection (5)
above. The Series D Bonds may be executed by the Company and delivered
to the Trustee for authentication and delivery. The principal of and
interest on the Bonds shall be payable at the Corporate Trust Office of
the Trustee in Houston, Texas.

The single Series D Bond shall be identified by the number D-1 and
shall upon issuance be delivered by the Company to, and registered in
the name of, the Trust Indenture Trustee, and shall be transferable
only as required to effect an assignment thereof to a successor or an
assign of the Trust Indenture Trustee under the Trust Indenture, and
provided that all obligations of the Trust Indenture Trustee under the
Collateral Agreement (as defined herein) shall also be transferred to,
and assumed by, any such successor or assign. The Series D Bonds are to
be issued to the Trust Indenture Trustee as security for the payment by
CenterPoint of the Installment Payments, as defined in, and pursuant to
the Installment Payment and Bond Amortization Agreement, dated as of
February 1, 1998, by and between the Issuer and CenterPoint (as
successor). The single Series D Bond shall be held by the Trust
Indenture Trustee subject to the terms of the Series D Bonds Collateral
Agreement (Series D Bonds), dated as of October 10, 2002, between the
Company and the Trust Indenture Trustee (the "Collateral Agreement").

Series D Bonds issued upon transfer shall be numbered consecutively
from D-2 upwards and issued in the same $100,000,000 denomination. See
also subsection (19) below.

(18) Not applicable.

(19) The holder of the Series D Bond by acceptance of the Series D
Bond agrees to restrictions on transfer and to waivers of certain
rights of exchange as set forth herein. The Series D Bonds have not
been registered under the Securities Act of 1933 and may not be
offered, sold or otherwise transferred in the absence of such
registration or an applicable exemption therefrom. No service charge
shall be made for the registration of transfer or exchange of the
Series D Bonds, or any Tranche thereof; provided, however, that the
Company may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection with the exchange or
transfer.

(20) For purposes of the Series D Bonds, "Business Day" means any
day other than (i) a Saturday or Sunday, (ii) a day on which commercial
banks in New York, New York, Houston, Texas, or the city in which the
principal corporate trust office of the Indenture Trustee is located,
are authorized by law to close or (iii) a day on which the New York
Stock Exchange is closed.

(21) Not applicable.

(22) The Trustee may conclusively presume that the obligation of
the Company to pay the principal of and interest on the Series D Bond
shall have been fully satisfied and discharged unless and until it
shall have received a written notice from the Indenture

3

Trustee, signed by an authorized officer of the Indenture Trustee and
attested by the Secretary or an Assistant Secretary of the Indenture
Trustee within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on the Series D
Bond has not been fully paid when due and specifying the amount of
funds required to make such payment.

The Series D Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.

2. The undersigned has read all of the covenants and conditions contained
in the Indenture, and the definitions in the Indenture relating thereto,
relating to the issuance of the Series D Bonds and in respect of compliance with
which this certificate is made.

3. The statements contained in this certificate are based upon the
familiarity of the undersigned with the Indenture, the documents accompanying
this certificate, and upon discussions by the undersigned with officers and
employees of the Company familiar with the matters set forth herein.

4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.

In the opinion of the undersigned, such conditions and covenants have
been complied with.

4

IN WITNESS WHEREOF, the undersigned has executed this
Officer's Certificate on this 10th day of October, 2002.

NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.

THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUST INDENTURE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO
HEREIN AMONG THE ISSUER AND THE TRUST INDENTURE TRUSTEE.

This Security is not an Original Discount Security
within the meaning of the within-mentioned Indenture.

Principal Amount
$100,000,000 No. D-1

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to JPMorgan Chase Bank as Trustee under
the Trust Indenture (as herein defined) or its registered assigns (the
"Indenture Trustee"), the principal sum of ONE HUNDRED MILLION DOLLARS, in whole
or in installments on such date or dates as the Issuer (as defined herein) has
any obligations under the Trust Indenture (as amended and supplemented, the
"Trust Indenture"), dated as of February 1, 1998, between Brazos River Authority
(the "Issuer") and the Indenture Trustee (as successor) to repay any principal
in respect of the 1998A Bonds (as such term is defined in the Trust Indenture,
and hereinafter referred to as the "Series 1998A BR Bonds"), excluding any
payment of principal in advance of the final scheduled maturity date thereof,
but not later than the Stated Maturity specified above. The obligation of the
Company to make any payment of principal on this Bond, whether at maturity or
otherwise, shall be fully or partially, as the case may be, deemed to have been
paid or otherwise satisfied and discharged to the extent CenterPoint Energy,
Inc. ("CenterPoint") has paid to the Indenture Trustee the Installment Payment
(as defined below) in respect of the principal then due and payable on the
Series 1998A BR Bonds.

Interest shall be payable on this Bond on each Interest Payment Date (as
hereinafter defined) at such rate per annum as shall cause the amount of
interest payable on such Interest Payment Date on this Bond to equal the amount
of regularly scheduled interest payable on such Interest Payment Date in respect
of the Series 1998A BR Bonds under the Trust Indenture. Such interest shall be
payable on the same dates as interest is payable from time to time in respect of
the Series 1998A BR Bonds pursuant to the Trust Indenture (each such date herein
called an "Interest Payment Date"), until the maturity of this Bond, or, if the
Company shall default in the payment of the principal due on this Bond, until
the Company's obligation with respect to the payment of such principal shall be
discharged as provided in the Indenture. The amount of interest payable from
time to time in respect of the Series 1998A BR Bonds under the Trust Indenture,
the basis on which such interest is computed and the dates on which such
interest

1

is payable are set forth in the Trust Indenture. This Bond shall bear interest
(a) from the Interest Payment Date next preceding the date of this Bond to which
interest has been paid, or (b) if the date of this Bond is an Interest Payment
Date to which interest has been paid, then from such date, or (c) if no interest
has been paid on this Bond, then from the date of initial authentication of this
Bond. The obligation of the Company to make any payment of interest on this Bond
shall be fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent that CenterPoint has paid to
the Trust Indenture Trustee the Installment Payment in respect of the interest
then due and payable on the Series 1998A BR Bonds.

This Bond is issued to the Trust Indenture Trustee as security for the payment
by CenterPoint of the Installment Payments, as defined in, and pursuant to the
Installment Payment and Bond Amortization Agreement, dated as of February 1,
1998, between the Brazos River Authority and CenterPoint (as successor). This
Bond shall be held by the Trust Indenture Trustee subject to the terms of the
Collateral Agreement, (Series D Bonds) dated as of October 10, 2002, between the
Company and the Indenture Trustee. Any capitalized terms used herein and not
defined herein shall have the meanings specified in the Indenture (as defined
below), unless otherwise noted.

The Indenture Trustee shall surrender this Bond to the Trustee when all of the
principal of and interest on the Series 1998A BR Bonds shall have been duly
paid, and the Trust Indenture shall have been terminated.

Payments of the principal of and interest on this Bond shall be made at the
Corporate Trust Office of JPMorgan Chase Bank, as Trustee, located at 600 Travis
Street, Suite 1150, Houston, Texas 77002, or at such other office or agency as
may be designated for such purpose by the Company from time to time. Payment of
the principal of and interest on this Bond, as aforesaid, shall be made in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for the payment of public and private debts.

This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a description of the property mortgaged, pledged and held in
trust, the nature and extent of the security and the respective rights,
limitations of rights, duties and immunities of the Company, the Trustee and the
Holders of the Securities thereunder and of the terms and conditions upon which
the Securities are, and are to be, authenticated and delivered and secured. The
acceptance of this Bond shall be deemed to constitute the consent and agreement
by the Holder hereof to all of the terms and provisions of the Indenture. This
Bond is one of the series designated above.

The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.

If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions

2

permitting the Holders of a majority in principal amount of the Securities then
Outstanding, on behalf of the Holders of all Securities, to waive compliance by
the Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Bond shall be conclusive and binding upon such Holder and upon
all future Holders of this Bond and of any Security issued upon the registration
of transfer hereof or in exchange therefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Bond.

As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Bond is registrable in the Security Register, upon
surrender of this Bond for registration of transfer at the Corporate Trust
Office of JPMorgan Chase Bank in Houston, Texas or such other office or agency
as may be designated by the Company from time to time, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Bonds of this
series of authorized denominations and of like tenor and aggregate principal
amount, will be issued to the designated transferee or transferees.

The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.

The Trustee may conclusively presume that the obligation of the Company to pay
the principal of and interest on this Bond shall have been fully satisfied and
discharged unless and until it shall have received a written notice from the
Trust Indenture Trustee, signed by an authorized officer of the Trust Indenture
Trustee and attested by the Secretary or an Assistant Secretary of the Trust
Indenture Trustee within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on this Bond has not been
fully paid when due and specifying the amount of funds required to make such
payment.

Before any transfer of this Bond by the registered holder or his or its legal
representative will be recognized or given effect by the Company or the Trustee,
the registered holder shall notify the Company and the Trustee of the name and
address of the transferee. By acceptance hereof the holder of this Bond and each
transferee shall be deemed to have agreed to indemnify and hold harmless the
Company and the Trustee against all losses, claims, damages or liability arising
out of any failure on part of the holder or of any such transferee to comply
with the requirements of the preceding sentence.

No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.

This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.

Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any

3

purpose.

[The remainder of this page is intentionally left blank.]

4

IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

By: _____________________________________

Name:

Title:

CERTIFICATE OF AUTHENTICATION

This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.

Date of Authentication: ______, 2002

JPMORGAN CHASE BANK, as Trustee

By: _____________________________________

Authorized Signatory

5

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

OFFICER'S CERTIFICATE

October 10, 2002

I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated October 10, 2002, and Sections 105, 201, 301, 401(1) and 402(2)(A)
of the General Mortgage Indenture dated as of October 10, 2002, as heretofore
supplemented to the date hereof (as heretofore supplemented, the "Indenture"),
between the Company and JPMorgan Chase Bank, as Trustee (the "Trustee"). Terms
used herein and not otherwise defined herein shall have the meanings assigned to
them in the Indenture unless the context clearly requires otherwise. Based upon
the foregoing, I hereby certify on behalf of the Company as follows:

1. The terms and conditions of the Securities of the series described in
this Officer's Certificate are as follows (the numbered subdivisions set forth
in this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):

(1) The Securities of the fifth series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series E, due
November 1, 2020" (the "Series E Bonds").

(2) The Series E Bonds shall be initially authenticated and
delivered in the aggregate principal amount of $90,000,000.

(3) Not applicable.

(4) The Series E Bonds shall mature and the principal thereof
shall be due and payable together with all accrued and unpaid interest
thereon on November 1, 2020. The obligation of the Company to make any
payment of principal on this Bond shall be fully or partially, as the
case may be, deemed to have been paid or otherwise satisfied and
discharged to the extent CenterPoint Energy, Inc. ("CenterPoint") has
paid to the Trust Indenture Trustee the Installment Payment (as defined
below) in respect of the principal then due and payable on the Bonds
(as such term is defined in the Trust Indenture, and hereinafter
referred to as the "Series 1998B BR Bonds").

(5) The Series E Bonds shall bear interest from the time
hereinafter provided at such rate per annum as shall cause the amount
of interest payable on each Interest Payment Date (as hereinafter
defined) on the Series E Bonds to equal the amount of regularly
scheduled interest payable on such Interest Payment Date under the
Trust Indenture dated as of February 1, 1998 (as amended and
supplemented, the "Trust Indenture") between Brazos River Authority
(the "Issuer") and JPMorgan Chase Bank (successor to Chase Bank of
Texas, National Association), as trustee (the "Trust Indenture
Trustee") in respect of the Series 1998A BR Bonds. Such interest on the
Series E Bonds shall be

payable on the same dates as interest is payable from time to time in
respect of the Series 1998B BR Bonds pursuant to the Trust Indenture
(each such date herein called an "Interest Payment Date"), until the
maturity of the Series E Bonds, or, in the case of any default by the
Company in the payment of the principal due on the Series E Bonds,
until the Company's obligation with respect to the payment of such
principal shall be discharged as provided in the Indenture. The amount
of interest payable from time to time in respect of the Series 1998B BR
Bonds under the Trust Indenture, the basis on which such interest is
computed and the dates on which such interest is payable are set forth
in the Trust Indenture. Each Series E Bond shall bear interest from the
later of the date of initial authentication of such Series E Bond or
the most recent Interest Payment Date to which interest has been paid.
The obligation of the Company to make any payment of interest on the
Series E Bonds shall be fully or partially, as the case may be, deemed
to have been paid or otherwise satisfied and discharged to the extent
that CenterPoint has paid to the Trust Indenture Trustee the
Installment Payment in respect of the interest then due and payable on
the Series 1998B BR Bonds.

(6) The Corporate Trust Office of JPMorgan Chase Bank in Houston,
Texas shall be the place at which (i) the principal of, premium and
interest on, the Series E Bonds shall be payable, (ii) registration of
transfer of the Series E Bonds may be effected, (iii) exchanges of the
Series E Bonds may be effected and (iv) notices and demands to or upon
the Company in respect of the Series E Bonds and the Indenture may be
served; and JPMorgan Chase Bank shall be the Security Registrar for the
Series E Bonds; provided, however, that the Company reserves the right
to change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves
the right to designate, by one or more Officer's Certificates, its
principal office in Houston, Texas as any such place or itself as the
Security Registrar; provided, however, that there shall be only a
single Security Registrar for the Series E Bonds.

(7) Not applicable.

(8) Not applicable.

(9) The Series E Bonds are issuable only in denominations of
$90,000,000.

(10) Not applicable.

(11) Not applicable.

(12) Not applicable.

(13) Not applicable.

(14) Not applicable.

(15) Not applicable.

(16) Not applicable.

2

(17) The Series E Bonds shall be evidenced by a single registered
Series E Bond in the principal amount and denomination of Ninety
Million Dollars ($90,000,000). The Series E Bonds shall be dated
October 10, 2002, shall mature no later than November 1, 2020, unless
sooner paid, and shall bear interest at the rate specified in
subsection (5) above. The Series E Bonds may be executed by the Company
and delivered to the Trustee for authentication and delivery. The
principal of and interest on the Bonds shall be payable at the
Corporate Trust Office of the Trustee in Houston, Texas.

The single Series E Bond shall be identified by the number E-1 and
shall upon issuance be delivered by the Company to, and registered in
the name of, the Trust Indenture Trustee, and shall be transferable
only as required to effect an assignment thereof to a successor or an
assign of the Trust Indenture Trustee under the Trust Indenture, and
provided that all obligations of the Trust Indenture Trustee under the
Collateral Agreement (as defined herein) shall also be transferred to,
and assumed by, any such successor or assign. The Series E Bonds are to
be issued to the Trust Indenture Trustee as security for the payment by
CenterPoint of the Installment Payments, as defined in, and pursuant to
the Installment Payment and Bond Amortization Agreement, dated as of
February 1, 1998, by and between the Issuer and CenterPoint (as
successor). The single Series E Bond shall be held by the Trust
Indenture Trustee subject to the terms of the Series E Bonds Collateral
Agreement (Series E Bonds), dated as of October 10, 2002, between the
Company and the Trust Indenture Trustee (the "Collateral Agreement").

Series E Bonds issued upon transfer shall be numbered consecutively
from E-2 upwards and issued in the same $90,000,000 denomination. See
also subsection (19) below.

(18) Not applicable.

(19) The holder of the Series E Bond by acceptance of the Series E
Bond agrees to restrictions on transfer and to waivers of certain
rights of exchange as set forth herein. The Series E Bonds have not
been registered under the Securities Act of 1933 and may not be
offered, sold or otherwise transferred in the absence of such
registration or an applicable exemption therefrom. No service charge
shall be made for the registration of transfer or exchange of the
Series E Bonds, or any Tranche thereof; provided, however, that the
Company may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection with the exchange or
transfer.

(20) For purposes of the Series E Bonds, "Business Day" means any
day other than (i) a Saturday or Sunday, (ii) a day on which commercial
banks in New York, New York, Houston, Texas, or the city in which the
principal corporate trust office of the Indenture Trustee is located,
are authorized by law to close or (iii) a day on which the New York
Stock Exchange is closed.

(21) Not applicable.

(22) The Trustee may conclusively presume that the obligation of
the Company to pay the principal of and interest on the Series E Bond
shall have been fully satisfied and discharged unless and until it
shall have received a written notice from the Indenture

3

Trustee, signed by an authorized officer of the Indenture Trustee and
attested by the Secretary or an Assistant Secretary of the Indenture
Trustee within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on the Series E
Bond has not been fully paid when due and specifying the amount of
funds required to make such payment.

The Series E Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be issued
in substantially such form.

2. The undersigned has read all of the covenants and conditions contained
in the Indenture, and the definitions in the Indenture relating thereto,
relating to the issuance of the Series E Bonds and in respect of compliance with
which this certificate is made.

3. The statements contained in this certificate are based upon the
familiarity of the undersigned with the Indenture, the documents accompanying
this certificate, and upon discussions by the undersigned with officers and
employees of the Company familiar with the matters set forth herein.

4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.

In the opinion of the undersigned, such conditions and covenants have
been complied with.

4

IN WITNESS WHEREOF, the undersigned has executed this
Officer's Certificate on this 10th day of October, 2002.

NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.

THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUST INDENTURE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO
HEREIN AMONG THE ISSUER AND THE TRUST INDENTURE TRUSTEE.

This Security is not an Original Discount Security
within the meaning of the within-mentioned Indenture.

Principal Amount
$90,000,000 No. E-1

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to JPMorgan Chase Bank as Trustee under
the Trust Indenture (as herein defined) or its registered assigns (the
"Indenture Trustee"), the principal sum of NINETY MILLION DOLLARS, in whole or
in installments on such date or dates as the Issuer (as defined herein) has any
obligations under the Trust Indenture (as amended and supplemented, the "Trust
Indenture"), dated as of February 1, 1998, between Brazos River Authority (the
"Issuer") and the Indenture Trustee (as successor) to reply any principal in
respect of the 1998B Bonds (as such term is defined in the Trust Indenture, and
hereinafter referred to as the "Series 1998B BR Bonds"), excluding any payment
of principal in advance of the final scheduled maturity date thereof, but not
later than the Stated Maturity specified above. The obligation of the Company to
make any payment of principal on this Bond, whether at maturity or otherwise,
shall be fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent CenterPoint Energy, Inc.
("CenterPoint") has paid to the Indenture Trustee the Installment Payment (as
defined below) in respect of the principal then due and payable on the Series
1998B BR Bonds.

Interest shall be payable on this Bond on each Interest Payment Date (as
hereinafter defined) at such rate per annum as shall cause the amount of
interest payable on such Interest Payment Date on this Bond to equal the amount
of regularly scheduled interest payable on such Interest Payment Date in respect
of the Series 1998B BR Bonds under the Trust Indenture. Such interest shall be
payable on the same dates as interest is payable from time to time in respect of
the Series 1998B BR Bonds pursuant to the Trust Indenture (each such date herein
called an "Interest Payment Date"), until the maturity of this Bond, or, if the
Company shall default in the payment of the principal due on this Bond, until
the Company's obligation with respect to the payment of such principal shall be
discharged as provided in the Indenture. The amount of interest payable from
time to time in respect of the Series 1998B BR Bonds under the Trust Indenture,
the basis on which such interest is computed and the dates on which such
interest

1

is payable are set forth in the Trust Indenture. This Bond shall bear interest
(a) from the Interest Payment Date next preceding the date of this Bond to which
interest has been paid, or (b) if the date of this Bond is an Interest Payment
Date to which interest has been paid, then from such date, or (c) if no interest
has been paid on this Bond, then from the date of initial authentication of this
Bond. The obligation of the Company to make any payment of interest on this Bond
shall be fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent that CenterPoint has paid to
the Indenture Trustee the Installment Payment in respect of the interest then
due and payable on the Series 1998B BR Bonds.

This Bond is issued to the Trust Indenture Trustee as security for the payment
by CenterPoint of the Installment Payments, as defined in, and pursuant to the
Installment Payment and Bond Amortization Agreement, dated as of February 1,
1998, between the Brazos River Authority and CenterPoint (as successor). This
Bond shall be held by the Trust Indenture Trustee subject to the terms of the
Collateral Agreement (Series E Bonds), dated as of October 10, 2002, between the
Company and the Indenture Trustee. Any capitalized terms used herein and not
defined herein shall have the meanings specified in the Indenture (as defined
below), unless otherwise noted.

The Indenture Trustee shall surrender this Bond to the Trustee when all of the
principal of and interest on the Series 1998B BR Bonds shall have been duly
paid, and the Trust Indenture shall have been terminated.

Payments of the principal of and interest on this Bond shall be made at the
Corporate Trust Office of JPMorgan Chase Bank, as Trustee, located at 600 Travis
Street, Suite 1150, Houston, Texas 77002, or at such other office or agency as
may be designated for such purpose by the Company from time to time. Payment of
the principal of and interest on this Bond, as aforesaid, shall be made in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for the payment of public and private debts.

This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a description of the property mortgaged, pledged and held in
trust, the nature and extent of the security and the respective rights,
limitations of rights, duties and immunities of the Company, the Trustee and the
Holders of the Securities thereunder and of the terms and conditions upon which
the Securities are, and are to be, authenticated and delivered and secured. The
acceptance of this Bond shall be deemed to constitute the consent and agreement
by the Holder hereof to all of the terms and provisions of the Indenture. This
Bond is one of the series designated above.

The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.

If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions

2

permitting the Holders of a majority in principal amount of the Securities then
Outstanding, on behalf of the Holders of all Securities, to waive compliance by
the Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Bond shall be conclusive and binding upon such Holder and upon
all future Holders of this Bond and of any Security issued upon the registration
of transfer hereof or in exchange therefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Bond.

As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Bond is registrable in the Security Register, upon
surrender of this Bond for registration of transfer at the Corporate Trust
Office of JPMorgan Chase Bank in Houston, Texas or such other office or agency
as may be designated by the Company from time to time, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Bonds of this
series of authorized denominations and of like tenor and aggregate principal
amount, will be issued to the designated transferee or transferees.

The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.

The Trustee may conclusively presume that the obligation of the Company to pay
the principal of and interest on this Bond shall have been fully satisfied and
discharged unless and until it shall have received a written notice from the
Trust Indenture Trustee, signed by an authorized officer of the Trust Indenture
Trustee and attested by the Secretary or an Assistant Secretary of the Trust
Indenture Trustee within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on this Bond has not been
fully paid when due and specifying the amount of funds required to make such
payment.

Before any transfer of this Bond by the registered holder or his or its legal
representative will be recognized or given effect by the Company or the Trustee,
the registered holder shall notify the Company and the Trustee of the name and
address of the transferee. By acceptance hereof the holder of this Bond and each
transferee shall be deemed to have agreed to indemnify and hold harmless the
Company and the Trustee against all losses, claims, damages or liability arising
out of any failure on part of the holder or of any such transferee to comply
with the requirements of the preceding sentence.

No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.

This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.

Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any

3

purpose.

[The remainder of this page is intentionally left blank.]

4

IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

By: _____________________________________

Name:

Title:

CERTIFICATE OF AUTHENTICATION

This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.

Date of Authentication: ______, 2002

JPMORGAN CHASE BANK, as Trustee

By: _____________________________________

Authorized Signatory

5

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

OFFICER'S CERTIFICATE

October 10, 2002

I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated October 10, 2002, and Sections 105, 201, 301, 401(1) and 402(2)(A)
of the General Mortgage Indenture dated as of October 10, 2002, as heretofore
supplemented to the date hereof (as heretofore supplemented, the "Indenture"),
between the Company and JPMorgan Chase Bank, as Trustee (the "Trustee"). Terms
used herein and not otherwise defined herein shall have the meanings assigned to
them in the Indenture unless the context clearly requires otherwise. Based upon
the foregoing, I hereby certify on behalf of the Company as follows:

1. The terms and conditions of the Securities of the series described in
this Officer's Certificate are as follows (the numbered subdivisions set forth
in this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):

(1) The Securities of the sixth series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series F, due
May 1, 2019" (the "Series F Bonds").

(2) The Series F Bonds shall be initially authenticated and
delivered in the aggregate principal amount of $100,000,000.

(3) Not applicable.

(4) The Series F Bonds shall mature and the principal thereof
shall be due and payable together with all accrued and unpaid interest
thereon on May 1, 2019. The obligation of the Company to make any
payment of principal on this Bond shall be fully or partially, as the
case may be, deemed to have been paid or otherwise satisfied and
discharged to the extent CenterPoint Energy, Inc. ("CenterPoint") has
paid to the Trust Indenture Trustee the Installment Payment (as defined
below) in respect of the principal then due and payable on the Bonds
(as such term is defined in the Trust Indenture, and hereinafter
referred to as the "Series 1998C BR Bonds").

(5) The Series F Bonds shall bear interest from the time
hereinafter provided at such rate per annum as shall cause the amount
of interest payable on each Interest Payment Date (as hereinafter
defined) on the Series F Bonds to equal the amount of regularly
scheduled interest payable on such Interest Payment Date under the
Trust Indenture dated as of February 1, 1998 (as amended and
supplemented, the "Trust Indenture") between Brazos

1

River Authority (the "Issuer") and JPMorgan Chase Bank (successor to
Chase Bank of Texas, National Association), as trustee (the "Trust
Indenture Trustee") in respect of the Series 1998C BR Bonds. Such
interest on the Series F Bonds shall be payable on the same dates as
interest is payable from time to time in respect of the Series 1998C BR
Bonds pursuant to the Trust Indenture (each such date herein called an
"Interest Payment Date"), until the maturity of the Series F Bonds, or,
in the case of any default by the Company in the payment of the
principal due on the Series F Bonds, until the Company's obligation
with respect to the payment of such principal shall be discharged as
provided in the Indenture. The amount of interest payable from time to
time in respect of the Series 1998C BR Bonds under the Trust Indenture,
the basis on which such interest is computed and the dates on which
such interest is payable are set forth in the Trust Indenture. Each
Series F Bond shall bear interest from the later of the date of initial
authentication of such Series F Bond or the most recent Interest
Payment Date to which interest has been paid. The obligation of the
Company to make any payment of interest on the Series F Bonds shall be
fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent that CenterPoint has
paid to the Trust Indenture Trustee the Installment Payment in respect
of the interest then due and payable on the Series 1998C BR Bonds.

(6) The Corporate Trust Office of JPMorgan Chase Bank in Houston,
Texas shall be the place at which (i) the principal of, premium and
interest on, the Series F Bonds shall be payable, (ii) registration of
transfer of the Series F Bonds may be effected, (iii) exchanges of the
Series F Bonds may be effected and (iv) notices and demands to or upon
the Company in respect of the Series F Bonds and the Indenture may be
served; and JPMorgan Chase Bank shall be the Security Registrar for the
Series F Bonds; provided, however, that the Company reserves the right
to change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves
the right to designate, by one or more Officer's Certificates, its
principal office in Houston, Texas as any such place or itself as the
Security Registrar; provided, however, that there shall be only a
single Security Registrar for the Series F Bonds.

(7) Not applicable.

(8) Not applicable.

(9) The Series F Bonds are issuable only in denominations of
$100,000,000.

2

(10) Not applicable.

(11) Not applicable.

(12) Not applicable.

(13) Not applicable.

(14) Not applicable.

(15) Not applicable.

(16) Not applicable.

(17) The Series F Bonds shall be evidenced by a single registered
Series F Bond in the principal amount and denomination of One Hundred
Million Dollars ($100,000,000). The Series F Bonds shall be dated
October 10, 2002, shall mature no later than May 1, 2019, unless sooner
paid, and shall bear interest at the rate specified in subsection (5)
above. The Series F Bonds may be executed by the Company and delivered
to the Trustee for authentication and delivery. The principal of and
interest on the Bonds shall be payable at the Corporate Trust Office of
the Trustee in Houston, Texas.

The single Series F Bond shall be identified by the number F-1 and
shall upon issuance be delivered by the Company to, and registered in
the name of, the Trust Indenture Trustee, and shall be transferable
only as required to effect an assignment thereof to a successor or an
assign of the Trust Indenture Trustee under the Trust Indenture, and
provided that all obligations of the Trust Indenture Trustee under the
Collateral Agreement (as defined herein) shall also be transferred to,
and assumed by any such successor or assign. The Series F Bonds are to
be issued to the Trust Indenture Trustee as security for the payment by
CenterPoint of the Installment Payments, as defined in, and pursuant to
the Installment Payment and Bond Amortization Agreement, dated as of
February 1, 1998, by and between the Issuer and CenterPoint (as
successor). The single Series F Bond shall be held by the Trust
Indenture Trustee subject to the terms of the Series F Bonds Collateral
Agreement (Series F Bonds) , dated as of October 10, 2002, between the
Company and the Trust Indenture Trustee (the "Collateral Agreement").

Series F Bonds issued upon transfer shall be numbered consecutively
from F-2 upwards and issued in the same $100,000,000 denomination. See
also subsection (19) below.

(18) Not applicable.

(19) The holder of the Series F Bond by acceptance of the Series F
Bond agrees to restrictions on transfer and to waivers of certain
rights of exchange as set forth herein. The Series F Bonds have not
been registered under the Securities Act of 1933 and may not be
offered, sold or otherwise transferred in the absence of such
registration or an applicable exemption therefrom. No service charge
shall be made for the registration of transfer or exchange of the
Series F Bonds, or any Tranche thereof; provided, however,

3

that the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection with the
exchange or transfer.

(20) For purposes of the Series F Bonds, "Business Day" means any
day other than (i) a Saturday or Sunday, (ii) a day on which commercial
banks in New York, New York, Houston, Texas, or the city in which the
principal corporate trust office of the Indenture Trustee is located,
are authorized by law to close or (iii) a day on which the New York
Stock Exchange is closed.

(21) Not applicable.

(22) The Trustee may conclusively presume that the obligation of
the Company to pay the principal of and interest on the Series F Bond
shall have been fully satisfied and discharged unless and until it
shall have received a written notice from the Indenture Trustee, signed
by an authorized officer of the Indenture Trustee and attested by the
Secretary or an Assistant Secretary of the Indenture Trustee within 90
days after the applicable Interest Payment Date, stating that the
payment of principal of or interest on the Series F Bond has not been
fully paid when due and specifying the amount of funds required to make
such payment.

The Series F Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.

2. The undersigned has read all of the covenants and conditions contained
in the Indenture, and the definitions in the Indenture relating thereto,
relating to the issuance of the Series F Bonds and in respect of compliance with
which this certificate is made.

3. The statements contained in this certificate are based upon the
familiarity of the undersigned with the Indenture, the documents accompanying
this certificate, and upon discussions by the undersigned with officers and
employees of the Company familiar with the matters set forth herein.

4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.

In the opinion of the undersigned, such conditions and covenants have
been complied with.

4

IN WITNESS WHEREOF, the undersigned has executed this
Officer's Certificate on this 10th day of October, 2002.

NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.

THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUST INDENTURE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO
HEREIN AMONG THE ISSUER AND THE TRUST INDENTURE TRUSTEE.

This Security is not an Original Discount Security
within the meaning of the within-mentioned Indenture.

Principal Amount
$100,000,000 No. F-1

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to JPMorgan Chase Bank as Trustee under
the Trust Indenture (as herein defined) or its registered assigns (the
"Indenture Trustee"), the principal sum of ONE HUNDRED MILLION DOLLARS, in whole
or in installments on such date or dates as the Issuer (as defined herein) has
any obligations under the Trust Indenture (as amended and supplemented, the
"Trust Indenture"), dated as of February 1, 1998, between Brazos River Authority
(the "Issuer") and the Indenture Trustee (as successor) to repay any principal
in respect of the 1998C Bonds (as such term is defined in the Trust Indenture,
and hereinafter referred to as the "Series 1998C BR Bonds"), excluding any
payment of principal in advance of the final scheduled maturity date thereof,
but not later than the Stated Maturity specified above. The obligation of the
Company to make any payment of principal on this Bond, whether at maturity or
otherwise, shall be fully or partially, as the case may be, deemed to have been
paid or otherwise satisfied and discharged to the extent CenterPoint Energy,
Inc. ("CenterPoint") has paid to the Indenture Trustee the Installment Payment
(as defined below) in respect of the principal then due and payable on the
Series 1998C BR Bonds.

Interest shall be payable on this Bond on each Interest Payment Date (as
hereinafter defined) at such rate per annum as shall cause the amount of
interest payable on such Interest Payment Date on this Bond to equal the amount
of regularly scheduled interest payable on such Interest Payment Date in respect
of the Series 1998C BR Bonds under the Trust Indenture. Such interest shall be
payable on the same dates as interest is payable from time to time in respect of
the Series 1998C BR Bonds pursuant to the Trust Indenture (each such date herein
called an "Interest Payment Date"), until the maturity of this Bond, or, if the
Company shall default in the payment of the principal due on this Bond, until
the Company's obligation with respect to the payment of such principal shall be
discharged as provided in the Indenture. The amount of interest payable from
time to time in respect of the Series 1998C BR Bonds under the Trust Indenture,
the basis on which such interest is computed and the dates on which such
interest

1

is payable are set forth in the Trust Indenture. This Bond shall bear interest
(a) from the Interest Payment Date next preceding the date of this Bond to which
interest has been paid, or (b) if the date of this Bond is an Interest Payment
Date to which interest has been paid, then from such date, or (c) if no interest
has been paid on this Bond, then from the date of initial authentication of this
Bond. The obligation of the Company to make any payment of interest on this Bond
shall be fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent that CenterPoint has paid to
the Indenture Trustee the Installment Payment in respect of the interest then
due and payable on the Series 1998C BR Bonds.

This Bond is issued to the Trust Indenture Trustee as security for the payment
by CenterPoint of the Installment Payments, as defined in, and pursuant to the
Installment Payment and Bond Amortization Agreement, dated as of February 1,
1998, between the Brazos River Authority and CenterPoint (as successor). This
Bond shall be held by the Trust Indenture Trustee subject to the terms of the
Collateral Agreement (Series F Bonds), dated as of October 10, 2002, between the
Company and the Indenture Trustee. Any capitalized terms used herein and not
defined herein shall have the meanings specified in the Indenture (as defined
below), unless otherwise noted.

The Indenture Trustee shall surrender this Bond to the Trustee when all of the
principal of and interest on the Series 1998C BR Bonds shall have been duly
paid, and the Trust Indenture shall have been terminated.

Payments of the principal of and interest on this Bond shall be made at the
Corporate Trust Office of JPMorgan Chase Bank, as Trustee, located at 600 Travis
Street, Suite 1150, Houston, Texas 77002, or at such other office or agency as
may be designated for such purpose by the Company from time to time. Payment of
the principal of and interest on this Bond, as aforesaid, shall be made in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for the payment of public and private debts.

This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a description of the property mortgaged, pledged and held in
trust, the nature and extent of the security and the respective rights,
limitations of rights, duties and immunities of the Company, the Trustee and the
Holders of the Securities thereunder and of the terms and conditions upon which
the Securities are, and are to be, authenticated and delivered and secured. The
acceptance of this Bond shall be deemed to constitute the consent and agreement
by the Holder hereof to all of the terms and provisions of the Indenture. This
Bond is one of the series designated above.

The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.

If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions

2

permitting the Holders of a majority in principal amount of the Securities then
Outstanding, on behalf of the Holders of all Securities, to waive compliance by
the Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Bond shall be conclusive and binding upon such Holder and upon
all future Holders of this Bond and of any Security issued upon the registration
of transfer hereof or in exchange therefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Bond.

As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Bond is registrable in the Security Register, upon
surrender of this Bond for registration of transfer at the Corporate Trust
Office of JPMorgan Chase Bank in Houston, Texas or such other office or agency
as may be designated by the Company from time to time, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Bonds of this
series of authorized denominations and of like tenor and aggregate principal
amount, will be issued to the designated transferee or transferees.

The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.

The Trustee may conclusively presume that the obligation of the Company to pay
the principal of and interest on this Bond shall have been fully satisfied and
discharged unless and until it shall have received a written notice from the
Trust Indenture Trustee, signed by an authorized officer of the Trust Indenture
Trustee and attested by the Secretary or an Assistant Secretary of the Trust
Indenture Trustee within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on this Bond has not been
fully paid when due and specifying the amount of funds required to make such
payment.

Before any transfer of this Bond by the registered holder or his or its legal
representative will be recognized or given effect by the Company or the Trustee,
the registered holder shall notify the Company and the Trustee of the name and
address of the transferee. By acceptance hereof the holder of this Bond and each
transferee shall be deemed to have agreed to indemnify and hold harmless the
Company and the Trustee against all losses, claims, damages or liability arising
out of any failure on part of the holder or of any such transferee to comply
with the requirements of the preceding sentence.

No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.

This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.

Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any

3

purpose.

[The remainder of this page is intentionally left blank.]

4

IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

By: _____________________________________

Name:

Title:

CERTIFICATE OF AUTHENTICATION

This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.

Date of Authentication: ______, 2002

JPMORGAN CHASE BANK, as Trustee

By: _____________________________________

Authorized Signatory

5

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

OFFICER'S CERTIFICATE

October 10, 2002

I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated October 10, 2002, and Sections 105, 201, 301, 401(1) and 402(2)(A)
of the General Mortgage Indenture dated as of October 10, 2002, as heretofore
supplemented to the date hereof (as heretofore supplemented, the "Indenture"),
between the Company and JPMorgan Chase Bank, as Trustee (the "Trustee"). Terms
used herein and not otherwise defined herein shall have the meanings assigned to
them in the Indenture unless the context clearly requires otherwise. Based upon
the foregoing, I hereby certify on behalf of the Company as follows:

1. The terms and conditions of the Securities of the series described in
this Officer's Certificate are as follows (the numbered subdivisions set forth
in this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):

(1) The Securities of the seventh series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series G, due
January 1, 2011" (the "Series G Bonds").

(2) The Series G Bonds shall be initially authenticated and
delivered in the aggregate principal amount of $19,200,000.

(3) Not applicable.

(4) The Series G Bonds shall mature and the principal thereof
shall be due and payable together with all accrued and unpaid interest
thereon on January 1, 2011. The obligation of the Company to make any
payment of principal on this Bond shall be fully or partially, as the
case may be, deemed to have been paid or otherwise satisfied and
discharged to the extent CenterPoint Energy, Inc. ("CenterPoint") has
paid to the Trust Indenture Trustee the Installment Payment (as defined
below) in respect of the principal then due and payable on the Bonds
(as such term is defined in the Trust Indenture, and hereinafter
referred to as the "Series 1999 GC Bonds").

(5) The Series G Bonds shall bear interest from the time
hereinafter provided at such rate per annum as shall cause the amount
of interest payable on each Interest Payment Date (as hereinafter
defined) on the Series G Bonds to equal the amount of regularly
scheduled interest payable on such Interest Payment Dates under the
Trust Indenture dated as of April 1, 1999 (as amended and supplemented,
the "Trust Indenture") between Gulf Coast Waste

Disposal Authority (the "Issuer") and JPMorgan Chase Bank (successor to
Chase Bank of Texas, National Association), as trustee (the "Trust
Indenture Trustee") in respect of the Series 1999 GC Bonds". Such
interest on the Series G Bonds shall be payable on the same dates as
interest is payable from time to time in respect of the Series 1999 GC
Bonds pursuant to the Trust Indenture (each such date herein called an
"Interest Payment Date"), until the maturity of the Series G Bonds, or,
in the case of any default by the Company in the payment of the
principal due on the Series G Bonds, until the Company's obligation
with respect to the payment of such principal shall be discharged as
provided in the Indenture. The amount of interest payable from time to
time in respect of the Series 1999 GC Bonds under the Trust Indenture,
the basis on which such interest is computed and the dates on which
such interest is payable are set forth in the Trust Indenture. Each
Series G Bond shall bear interest from the later of the date of initial
authentication of such Series G Bond or the most recent Interest
Payment Date to which interest has been paid. The obligation of the
Company to make any payment of interest on the Series G Bonds shall be
fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent that CenterPoint has
paid to the Trust Indenture Trustee the Installment Payment in respect
of the interest then due and payable on the Series 1999 GC Bonds.

(6) The Corporate Trust Office of JPMorgan Chase Bank in Houston,
Texas shall be the place at which (i) the principal of, premium and
interest on, the Series G Bonds shall be payable, (ii) registration of
transfer of the Series G Bonds may be effected, (iii) exchanges of the
Series G Bonds may be effected and (iv) notices and demands to or upon
the Company in respect of the Series G Bonds and the Indenture may be
served; and JPMorgan Chase Bank shall be the Security Registrar for the
Series G Bonds; provided, however, that the Company reserves the right
to change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves
the right to designate, by one or more Officer's Certificates, its
principal office in Houston, Texas as any such place or itself as the
Security Registrar; provided, however, that there shall be only a
single Security Registrar for the Series G Bonds.

(7) Not applicable.

(8) Not applicable.

(9) The Series G Bonds are issuable only in denominations of
$19,200,000.

(10) Not applicable.

(11) Not applicable.

(12) Not applicable.

(13) Not applicable.

(14) Not applicable.

(15) Not applicable.

(16) Not applicable.

(17) The Series G Bonds shall be evidenced by a single registered
Series G Bond in the principal amount and denomination of Nineteen
Million Two Hundred Thousand Dollars ($19,200,000). The Series G Bonds
shall be dated October 10, 2002, shall mature no later than January 1,
2011, unless sooner paid, and shall bear interest at the rate specified
in subsection (5) above. The Series G Bonds may be executed by the
Company and delivered to the Trustee for authentication and delivery.
The principal of and interest on the Bonds shall be payable at the
Corporate Trust Office of the Trustee in Houston, Texas.

The single Series G Bond shall be identified by the number G-1 and
shall upon issuance be delivered by the Company to, and registered in
the name of, the Trust Indenture Trustee, and shall be transferable
only as required to effect an assignment thereof to a successor or an
assign of the Trust Indenture Trustee under the Trust Indenture, and
provided that all obligations of the Trust Indenture Trustee under the
Collateral Agreement (as defined herein) shall also be transferred to,
and assumed by, any such successor or assign. The Series G Bonds are to
be issued to the Trust Indenture Trustee as security for the payment by
CenterPoint of the Installment Payments, as defined in, and pursuant to
the Installment Payment and Bond Amortization Agreement, dated as of
April 1, 1999, by and between the Issuer and CenterPoint (as
successor). The single Series G Bond shall be held by the Trust
Indenture Trustee subject to the terms of the Series G Bonds Collateral
Agreement (Series G Bonds), dated as of October 10, 2002, between the
Company and the Trust Indenture Trustee (the "Collateral Agreement").

Series G Bonds issued upon transfer shall be numbered consecutively
from G-2 upwards and issued in the same $19,200,000 denomination. See
also subsection (19) below.

(18) Not applicable.

(19) The holder of the Series G Bond by acceptance of the Series G
Bond agrees to restrictions on transfer and to waivers of certain
rights of exchange as set forth herein. The Series G Bonds have not
been registered under the Securities Act of 1933 and may not be
offered, sold or otherwise transferred in the absence of such
registration or an applicable exemption therefrom. No service charge
shall be made for the registration of transfer or exchange of the
Series G Bonds, or any Tranche thereof; provided, however,

that the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection with the
exchange or transfer.

(20) For purposes of the Series G Bonds, "Business Day" means any
day other than (i) a Saturday or Sunday, (ii) a day on which commercial
banks in New York, New York, Houston, Texas, or the city in which the
principal corporate trust office of the Indenture Trustee is located,
are authorized by law to close or (iii) a day on which the New York
Stock Exchange is closed.

(21) Not applicable.

(22) The Trustee may conclusively presume that the obligation of
the Company to pay the principal of and interest on the Series G Bond
shall have been fully satisfied and discharged unless and until it
shall have received a written notice from the Indenture Trustee, signed
by an authorized officer of the Indenture Trustee and attested by the
Secretary or an Assistant Secretary of the Indenture Trustee within 90
days after the applicable Interest Payment Date, stating that the
payment of principal of or interest on the Series G Bond has not been
fully paid when due and specifying the amount of funds required to make
such payment.

The Series G Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be issued
in substantially such form.

2. The undersigned has read all of the covenants and conditions contained
in the Indenture, and the definitions in the Indenture relating thereto,
relating to the issuance of the Series G Bonds and in respect of compliance with
which this certificate is made.

3. The statements contained in this certificate are based upon the
familiarity of the undersigned with the Indenture, the documents accompanying
this certificate, and upon discussions by the undersigned with officers and
employees of the Company familiar with the matters set forth herein.

4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.

In the opinion of the undersigned, such conditions and covenants have
been complied with.

IN WITNESS WHEREOF, the undersigned has executed this
Officer's Certificate on this 10th day of October, 2002.

NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.

THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUST INDENTURE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO
HEREIN AMONG THE ISSUER AND THE TRUST INDENTURE TRUSTEE.

This Security is not an Original Discount Security
within the meaning of the within-mentioned Indenture.

Principal Amount
$19,200,000 No. G-1

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to JPMorgan Chase Bank as Trustee under
the Trust Indenture (as herein defined) or its registered assigns (the
"Indenture Trustee"), the principal sum of NINETEEN MILLION TWO HUNDRED THOUSAND
DOLLARS, in whole or in installments on such date or dates as the Issuer (as
defined herein) has any obligations under the Trust Indenture (as amended and
supplemented, the "Trust Indenture"), dated as of April 1, 1999, between Gulf
Coast Waste Disposal Authority (the "Issuer") and the Indenture Trustee (as
successor) to repay any principal in respect of the Bonds (as such term is
defined in the Trust Indenture, and hereinafter referred to as the "Series 1999
GC Bonds"), excluding any payment of principal in advance of the final scheduled
maturity date thereof, but not later than the Stated Maturity specified above.
The obligation of the Company to make any payment of principal on this Bond,
whether at maturity or otherwise, shall be fully or partially, as the case may
be, deemed to have been paid or otherwise satisfied and discharged to the extent
CenterPoint Energy, Inc. ("CenterPoint") has paid to the Indenture Trustee the
Installment Payment (as defined below) in respect of the principal then due and
payable on the Series 1999 GC Bonds.

Interest shall be payable on this Bond on each Interest Payment Date (as
hereinafter defined) at such rate per annum as shall cause the amount of
interest payable on such Interest Payment Date on this Bond to equal the amount
of regularly scheduled interest payable on such Interest Payment Date in respect
of the Series 1999 GC Bonds under the Trust Indenture. Such interest shall be
payable on the same dates as interest is payable from time to time in respect of
the Series 1999 GC Bonds pursuant to the Trust Indenture (each such date herein
called an "Interest Payment Date"), until the maturity of this Bond, or, if the
Company shall default in the payment of the principal due on this Bond, until
the Company's obligation with respect to the payment of such principal shall be
discharged as provided in the Indenture. The amount of interest payable from
time to time in respect of the Series 1999 GC Bonds under the Trust Indenture,
the basis on which such interest is computed and the dates on which such
interest is

1

payable are set forth in the Trust Indenture. This Bond shall bear interest (a)
from the Interest Payment Date next preceding the date of this Bond to which
interest has been paid, or (b) if the date of this Bond is an Interest Payment
Date to which interest has been paid, then from such date, or (c) if no interest
has been paid on this Bond, then from the date of initial authentication of this
Bond. The obligation of the Company to make any payment of interest on this Bond
shall be fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent that CenterPoint has paid to
the Indenture Trustee the Installment Payment in respect of the interest then
due and payable on the Series 1999 GC Bonds.

This Bond is issued to the Trust Indenture Trustee as security for the payment
by CenterPoint of the Installment Payments, as defined in, and pursuant to the
Installment Payment and Bond Amortization Agreement, dated as of April 1, 1999,
between Gulf Coast Waste Disposal Authority and CenterPoint (as successor). This
Bond shall be held by the Trust Indenture Trustee subject to the terms of the
Collateral Agreement (Series G Bonds), dated as of October 10, 2002, between the
Company and the Indenture Trustee. Any capitalized terms used herein and not
defined herein shall have the meanings specified in the Indenture (as defined
below), unless otherwise noted.

The Indenture Trustee shall surrender this Bond to the Trustee when all of the
principal of and interest on the Series 1999 GC Bonds shall have been duly paid,
and the Trust Indenture shall have been terminated.

Payments of the principal of and interest on this Bond shall be made at the
Corporate Trust Office of JPMorgan Chase Bank, as Trustee, located at 600 Travis
Street, Suite 1150, Houston, Texas 77002, or at such other office or agency as
may be designated for such purpose by the Company from time to time. Payment of
the principal of and interest on this Bond, as aforesaid, shall be made in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for the payment of public and private debts.

This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a description of the property mortgaged, pledged and held in
trust, the nature and extent of the security and the respective rights,
limitations of rights, duties and immunities of the Company, the Trustee and the
Holders of the Securities thereunder and of the terms and conditions upon which
the Securities are, and are to be, authenticated and delivered and secured. The
acceptance of this Bond shall be deemed to constitute the consent and agreement
by the Holder hereof to all of the terms and provisions of the Indenture. This
Bond is one of the series designated above.

The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.

If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions

2

permitting the Holders of a majority in principal amount of the Securities then
Outstanding, on behalf of the Holders of all Securities, to waive compliance by
the Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Bond shall be conclusive and binding upon such Holder and upon
all future Holders of this Bond and of any Security issued upon the registration
of transfer hereof or in exchange therefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Bond.

As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Bond is registrable in the Security Register, upon
surrender of this Bond for registration of transfer at the Corporate Trust
Office of JPMorgan Chase Bank in Houston, Texas or such other office or agency
as may be designated by the Company from time to time, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Bonds of this
series of authorized denominations and of like tenor and aggregate principal
amount, will be issued to the designated transferee or transferees.

The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.

The Trustee may conclusively presume that the obligation of the Company to pay
the principal of and interest on this Bond shall have been fully satisfied and
discharged unless and until it shall have received a written notice from the
Trust Indenture Trustee, signed by an authorized officer of the Trust Indenture
Trustee and attested by the Secretary or an Assistant Secretary of the Trust
Indenture Trustee within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on this Bond has not been
fully paid when due and specifying the amount of funds required to make such
payment.

Before any transfer of this Bond by the registered holder or his or its legal
representative will be recognized or given effect by the Company or the Trustee,
the registered holder shall notify the Company and the Trustee of the name and
address of the transferee. By acceptance hereof the holder of this Bond and each
transferee shall be deemed to have agreed to indemnify and hold harmless the
Company and the Trustee against all losses, claims, damages or liability arising
out of any failure on part of the holder or of any such transferee to comply
with the requirements of the preceding sentence.

No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.

This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.

Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any

3

purpose.

[The remainder of this page is intentionally left blank.]

4

IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

By: _____________________________________

Name:

Title:

CERTIFICATE OF AUTHENTICATION

This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.

Date of Authentication: ______, 2002

JPMORGAN CHASE BANK, as Trustee

By: _____________________________________

Authorized Signatory

5

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

OFFICER'S CERTIFICATE

October 10, 2002

I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated October 10, 2002, and Sections 105, 201, 301, 401(1) and 402(2)(A)
of the General Mortgage Indenture dated as of October 10, 2002, as heretofore
supplemented to the date hereof (as heretofore supplemented, the "Indenture"),
between the Company and JPMorgan Chase Bank, as Trustee (the "Trustee"). Terms
used herein and not otherwise defined herein shall have the meanings assigned to
them in the Indenture unless the context clearly requires otherwise. Based upon
the foregoing, I hereby certify on behalf of the Company as follows:

1. The terms and conditions of the Securities of the series described in
this Officer's Certificate are as follows (the numbered subdivisions set forth
in this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):

(1) The Securities of the eighth series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series H, due
June 1, 2026" (the "Series H Bonds").

(2) The Series H Bonds shall be initially authenticated and
delivered in the aggregate principal amount of $100,000,000.

(3) Not applicable.

(4) The Series H Bonds shall mature and the principal thereof
shall be due and payable together with all accrued and unpaid interest
thereon on June 1, 2026. The obligation of the Company to make any
payment of principal on this Bond shall be fully or partially, as the
case may be, deemed to have been paid or otherwise satisfied and
discharged to the extent CenterPoint Energy, Inc. ("CenterPoint") has
paid to the Trust Indenture Trustee the Installment Payment (as defined
below) in respect of the principal then due and payable on the Bonds
(as such term is defined in the Trust Indenture, and hereinafter
referred to as the "Series 1999A MC Bonds").

(5) The Series H Bonds shall bear interest from the time
hereinafter provided at such rate per annum as shall cause the amount
of interest payable on each Interest Payment Date (as hereinafter
defined) on the Series H Bonds to equal the amount of regularly
scheduled interest payable on such Interest Payment Date under the
Trust Indenture dated as of April 1, 1999 (as amended and supplemented,
the "Trust Indenture") between Matagorda

1

County Navigation District Number One (the "Issuer") and JPMorgan Chase
Bank (successor to Chase Bank of Texas, National Association, as
trustee (the "Trust Indenture Trustee") in respect of the Series 1999A
MC Bonds. Such interest on the Series H Bonds shall be payable on the
same dates as interest is payable from time to time in respect of the
Series 1999A MC Bonds pursuant to the Trust Indenture (each such date
herein called an "Interest Payment Date"), until the maturity of the
Series H Bonds, or, in the case of any default by the Company in the
payment of the principal due on the Series H Bonds, until the Company's
obligation with respect to the payment of such principal shall be
discharged as provided in the Indenture. The amount of interest payable
from time to time in respect of the Series 1999A MC Bonds under the
Trust Indenture, the basis on which such interest is computed and the
dates on which such interest is payable are set forth in the Trust
Indenture. Each Series H Bond shall bear interest from the later of the
date of initial authentication of such Series H Bond or the most recent
Interest Payment Date to which interest has been paid. The obligation
of the Company to make any payment of interest on the Series H Bonds
shall be fully or partially, as the case may be, deemed to have been
paid or otherwise satisfied and discharged to the extent that
CenterPoint has paid to the Trust Indenture Trustee the Installment
Payment in respect of the interest then due and payable on the Series
1999A MC Bonds.

(6) The Corporate Trust Office of JPMorgan Chase Bank in Houston,
Texas shall be the place at which (i) the principal of, premium and
interest on, the Series H Bonds shall be payable, (ii) registration of
transfer of the Series H Bonds may be effected, (iii) exchanges of the
Series H Bonds may be effected and (iv) notices and demands to or upon
the Company in respect of the Series H Bonds and the Indenture may be
served; and JPMorgan Chase Bank shall be the Security Registrar for the
Series H Bonds; provided, however, that the Company reserves the right
to change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves
the right to designate, by one or more Officer's Certificates, its
principal office in Houston, Texas as any such place or itself as the
Security Registrar; provided, however, that there shall be only a
single Security Registrar for the Series H Bonds.

(7) Not applicable.

(8) Not applicable.

2

(9) The Series H Bonds are issuable only in denominations of
$100,000,000.

(10) Not applicable.

(11) Not applicable.

(12) Not applicable.

(13) Not applicable.

(14) Not applicable.

(15) Not applicable.

(16) Not applicable.

(17) The Series H Bonds shall be evidenced by a single registered
Series H Bond in the principal amount and denomination of One Hundred
Million Dollars ($100,000,000). The Series H Bonds shall be dated
October 10, 2002, shall mature no later than June 1, 2026, unless
sooner paid, and shall bear interest at the rate specified in
subsection (5) above. The Series H Bonds may be executed by the Company
and delivered to the Trustee for authentication and delivery. The
principal of and interest on the Bonds shall be payable at the
Corporate Trust Office of the Trustee in Houston, Texas.

The single Series H Bond shall be identified by the number H-1 and
shall upon issuance be delivered by the Company to, and registered in
the name of, the Trust Indenture Trustee, and shall be transferable
only as required to effect an assignment thereof to a successor or an
assign of the Trust Indenture Trustee under the Trust Indenture, and
provided that all obligations of the Trust Indenture Trustee under the
Collateral Agreement (as defined herein) shall also be transferred to,
and assumed by, any such successor or assign. The Series H Bonds are to
be issued to the Trust Indenture Trustee as security for the payment by
CenterPoint of the Installment Payments, as defined in, and pursuant to
the Installment Payment and Bond Amortization Agreement, dated as of
April 1, 1999, by and between the Issuer and CenterPoint (as
successor). The single Series H Bond shall be held by the Trust
Indenture Trustee subject to the terms of the Series H Bonds Collateral
Agreement (Series H Bonds), dated as of October 10, 2002, between the
Company and the Trust Indenture Trustee (the "Collateral Agreement").

Series H Bonds issued upon transfer shall be numbered consecutively
from H-2 upwards and issued in the same $100,000,000 denomination. See
also subsection (19) below.

(18) Not applicable.

(19) The holder of the Series H Bond by acceptance of the Series H
Bond agrees to restrictions on transfer and to waivers of certain
rights of exchange as set forth herein. The Series H Bonds have not
been registered under the Securities Act of 1933 and may not be
offered, sold or otherwise transferred in the absence of such
registration or an applicable exemption therefrom. No service charge
shall be made for the registration of

3

transfer or exchange of the Series H Bonds, or any Tranche thereof;
provided, however, that the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in
connection with the exchange or transfer.

(20) For purposes of the Series H Bonds, "Business Day" means any
day other than (i) a Saturday or Sunday, (ii) a day on which commercial
banks in New York, New York, Houston, Texas, or the city in which the
principal corporate trust office of the Indenture Trustee is located,
are authorized by law to close or (iii) a day on which the New York
Stock Exchange is closed.

(21) Not applicable.

(22) The Trustee may conclusively presume that the obligation of
the Company to pay the principal of and interest on the Series H Bond
shall have been fully satisfied and discharged unless and until it
shall have received a written notice from the Indenture Trustee, signed
by an authorized officer of the Indenture Trustee and attested by the
Secretary or an Assistant Secretary of the Indenture Trustee within 90
days after the applicable Interest Payment Date, stating that the
payment of principal of or interest on the Series H Bond has not been
fully paid when due and specifying the amount of funds required to make
such payment.

The Series H Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.

2. The undersigned has read all of the covenants and conditions contained
in the Indenture, and the definitions in the Indenture relating thereto,
relating to the issuance of the Series H Bonds and in respect of compliance with
which this certificate is made.

3. The statements contained in this certificate are based upon the
familiarity of the undersigned with the Indenture, the documents accompanying
this certificate, and upon discussions by the undersigned with officers and
employees of the Company familiar with the matters set forth herein.

4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.

In the opinion of the undersigned, such conditions and covenants have
been complied with.

4

IN WITNESS WHEREOF, the undersigned has executed this
Officer's Certificate on this 10th day of October, 2002.

NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.

THIS BOND IS NOT TRANSFERABLE EXCEPT, AS FURTHER PROVIDED HEREIN, TO A SUCCESSOR
OR ASSIGN OF THE TRUST INDENTURE TRUSTEE UNDER THE TRUST INDENTURE REFERRED TO
HEREIN AMONG THE ISSUER AND THE TRUST INDENTURE TRUSTEE.

This Security is not an Original Discount Security
within the meaning of the within-mentioned Indenture.

Principal Amount
$100,000,000 No. H-1

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a corporation duly organized and
existing under the laws of the State of Texas (herein called the "Company,"
which term includes any successor under the Indenture referred to below), for
value received, hereby promises to pay to JPMorgan Chase Bank as Trustee under
the Trust Indenture (as herein defined) or its registered assigns (the
"Indenture Trustee"), the principal sum of ONE HUNDRED MILLION DOLLARS, in whole
or in installments on such date or dates as the Issuer (as defined herein) has
any obligations under the Trust Indenture (as amended and supplemented, the
"Trust Indenture"), dated as of April 1, 1999, between Matagorda County
Navigation District Number One (the "Issuer") and the Indenture Trustee (as
successor) to repay any principal in respect of the Bonds (as such term is
defined in the Trust Indenture, and hereinafter referred to as the "Series 1999A
MC Bonds"), excluding any payment of principal in advance of the final scheduled
maturity date thereof, but not later than the Stated Maturity specified above.
The obligation of the Company to make any payment of principal on this Bond,
whether at maturity or otherwise, shall be fully or partially, as the case may
be, deemed to have been paid or otherwise satisfied and discharged to the extent
CenterPoint Energy, Inc. ("CenterPoint") has paid to the Indenture Trustee the
Installment Payment (as defined below) in respect of the principal then due and
payable on the Series 1999A MC Bonds.

Interest shall be payable on this Bond on each Interest Payment Date (as
hereinafter defined) at such rate per annum as shall cause the amount of
interest payable on such Interest Payment Date on this Bond to equal the amount
of regularly scheduled interest payable on such Interest Payment Date in respect
of the Series 1999A MC Bonds under the Trust Indenture. Such interest shall be
payable on the same dates as interest is payable from time to time in respect of
the Series 1999A MC Bonds pursuant to the Trust Indenture (each such date herein
called an "Interest Payment Date"), until the maturity of this Bond, or, if the
Company shall default in the payment of the principal due on this Bond, until
the Company's obligation with respect to the payment of such principal shall be
discharged as provided in the Indenture. The amount of interest payable from
time to time in respect of the Series 1999A MC Bonds under the Trust Indenture,
the basis on which such interest is computed and the dates on which such
interest

1

is payable are set forth in the Trust Indenture. This Bond shall bear interest
(a) from the Interest Payment Date next preceding the date of this Bond to which
interest has been paid, or (b) if the date of this Bond is an Interest Payment
Date to which interest has been paid, then from such date, or (c) if no interest
has been paid on this Bond, then from the date of initial authentication of this
Bond. The obligation of the Company to make any payment of interest on this Bond
shall be fully or partially, as the case may be, deemed to have been paid or
otherwise satisfied and discharged to the extent that CenterPoint has paid to
the Indenture Trustee the Installment Payment in respect of the interest then
due and payable on the Series 1999A MC Bonds.

This Bond is issued to the Trust Indenture Trustee as security for the payment
by CenterPoint of the Installment Payments, as defined in, and pursuant to the
Installment Payment and Bond Amortization Agreement, dated as of April 1, 1999,
between Matagorda County Navigation District Number One and CenterPoint (as
successor). This Bond shall be held by the Trust Indenture Trustee subject to
the terms of the Collateral Agreement (Series H Bonds), of October 10, 2002,
between the Company and the Indenture Trustee. Any capitalized terms used herein
and not defined herein shall have the meanings specified in the Indenture (as
defined below), unless otherwise noted.

The Indenture Trustee shall surrender this Bond to the Trustee when all of the
principal of and interest on the Series 1999A MC Bonds shall have been duly
paid, and the Trust Indenture shall have been terminated.

Payments of the principal of and interest on this Bond shall be made at the
Corporate Trust Office of JPMorgan Chase Bank, as Trustee, located at 600 Travis
Street, Suite 1150, Houston, Texas 77002, or at such other office or agency as
may be designated for such purpose by the Company from time to time. Payment of
the principal of and interest on this Bond, as aforesaid, shall be made in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for the payment of public and private debts.

This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a description of the property mortgaged, pledged and held in
trust, the nature and extent of the security and the respective rights,
limitations of rights, duties and immunities of the Company, the Trustee and the
Holders of the Securities thereunder and of the terms and conditions upon which
the Securities are, and are to be, authenticated and delivered and secured. The
acceptance of this Bond shall be deemed to constitute the consent and agreement
by the Holder hereof to all of the terms and provisions of the Indenture. This
Bond is one of the series designated above.

The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.

If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the
Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions

2

permitting the Holders of a majority in principal amount of the Securities then
Outstanding, on behalf of the Holders of all Securities, to waive compliance by
the Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Bond shall be conclusive and binding upon such Holder and upon
all future Holders of this Bond and of any Security issued upon the registration
of transfer hereof or in exchange therefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Bond.

As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Bond is registrable in the Security Register, upon
surrender of this Bond for registration of transfer at the Corporate Trust
Office of JPMorgan Chase Bank in Houston, Texas or such other office or agency
as may be designated by the Company from time to time, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Bonds of this
series of authorized denominations and of like tenor and aggregate principal
amount, will be issued to the designated transferee or transferees.

The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.

The Trustee may conclusively presume that the obligation of the Company to pay
the principal of and interest on this Bond shall have been fully satisfied and
discharged unless and until it shall have received a written notice from the
Trust Indenture Trustee, signed by an authorized officer of the Trust Indenture
Trustee and attested by the Secretary or an Assistant Secretary of the Trust
Indenture Trustee within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on this Bond has not been
fully paid when due and specifying the amount of funds required to make such
payment.

Before any transfer of this Bond by the registered holder or his or its legal
representative will be recognized or given effect by the Company or the Trustee,
the registered holder shall notify the Company and the Trustee of the name and
address of the transferee. By acceptance hereof the holder of this Bond and each
transferee shall be deemed to have agreed to indemnify and hold harmless the
Company and the Trustee against all losses, claims, damages or liability arising
out of any failure on part of the holder or of any such transferee to comply
with the requirements of the preceding sentence.

No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of the indebtedness thereby authorized, or under
or by reason of any of the obligations, covenants or agreements contained in the
Indenture or in any indenture supplemental thereto or in any of the Bonds or
coupons thereby secured, or implied therefrom.

This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.

Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any

3

purpose.

[The remainder of this page is intentionally left blank.]

4

IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

By: _____________________________________

Name:

Title:

CERTIFICATE OF AUTHENTICATION

This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.

Date of Authentication: ______, 2002

JPMORGAN CHASE BANK, as Trustee

By: _____________________________________

Authorized Signatory

5

EXHIBIT 4(e)(12)

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

OFFICER'S CERTIFICATE

November 12, 2002

I, the undersigned officer of CenterPoint Energy Houston Electric, LLC, a Texas
limited liability company (the "Company"), do hereby certify that I am an
Authorized Officer of the Company as such term is defined in the Indenture (as
defined herein). I am delivering this certificate pursuant to the authority
granted in the Resolutions adopted by written consent of the Manager of the
Company dated November 12, 2002, and Sections 105, 201, 301, 401(1) and
402(2)(A) of the General Mortgage Indenture dated as of October 10, 2002, as
heretofore supplemented to the date hereof (as heretofore supplemented, the
"Indenture"), between the Company and JPMorgan Chase Bank, as Trustee (the
"Trustee"). Terms used herein and not otherwise defined herein shall have the
meanings assigned to them in the Indenture, unless the context clearly requires
otherwise. Based upon the foregoing, I hereby certify on behalf of the Company
as follows:

1. The terms and conditions of the Securities of the series described in
this Officer's Certificate are as follows (the numbered subdivisions set forth
in this Paragraph 1 corresponding to the numbered subdivisions of Section 301 of
the Indenture):

(1) The Securities of the ninth series to be issued under the
Indenture shall be designated "General Mortgage Bonds, Series I, due
November 12, 2005" (the "Series I Bonds").

(2) The Series I Bonds shall be authenticated and delivered in the
aggregate principal amount of $1,310,000,000.

(3) Not applicable.

(4) The principal of all Series I Bonds shall be payable by the
Company in whole or in installments on such date or dates as the
Company has any obligations under the Credit Agreement, dated as of
November 12, 2002 (the "Credit Agreement"), among the Company, Credit
Suisse First Boston, as administrative agent (the "Administrative
Agent") and the Banks from time to time parties thereto, to repay any
Loans (as defined in the Credit Agreement) to the Banks (whether upon
scheduled maturity, required prepayment, acceleration, demand or
otherwise, but not later than November 12, 2005). The amount of
principal of the Series I Bonds payable by the Company on any such date
shall equal the aggregate principal amount of the Loans due and payable
on such date pursuant to the Credit Agreement (but, in no event, shall
exceed the aggregate principal amount of the Series I Bonds). The
obligation of the Company to make any payment of the principal on the
Series I Bonds shall be fully or partially, as the case may be, deemed
to have been paid or otherwise satisfied and discharged to the extent
that the Company has paid the principal then due and payable on the
Loans made pursuant to the Credit Agreement.

(5) The Series I Bonds shall bear interest from the time
hereinafter provided at such rate per annum as shall cause the amount
of interest payable on each Interest Payment

Date (as hereinafter defined) on the Series I Bonds to equal the amount
of interest payable on such Interest Payment Date under the Credit
Agreement. Such interest on the Series I Bonds shall be payable on the
same dates as interest is payable from time to time pursuant to the
Credit Agreement (each such date herein called an "Interest Payment
Date"), until the maturity of the Series I Bonds, or, in the case of
any default by the Company in the payment of the principal due on the
Series I Bonds, until the Company's obligation with respect to the
payment of such principal shall be discharged as provided in the
Indenture. The amount of interest payable from time to time under the
Credit Agreement, the basis on which such interest is computed and the
dates on which such interest is payable are set forth in the Credit
Agreement. Each Series I Bond shall bear interest (a) from the date of
initial authentication of this Bond to but excluding the Interest
Payment Date next succeeding, and (b) from each Interest Payment Date
to but excluding the Interest Payment Date next succeeding. The
obligation of the Company to make any payment of interest on the Series
I Bonds shall be fully or partially, as the case may be, deemed to have
been paid or otherwise satisfied and discharged to the extent that the
Company has paid the interest on the Loans then due and payable
pursuant to the Credit Agreement.

(6) The Corporate Trust Office of JPMorgan Chase Bank in Houston,
Texas shall be the place at which (i) the principal of and interest on
the Series I Bonds shall be payable, (ii) registration of transfer of
the Series I Bonds may be effected, (iii) exchanges of the Series I
Bonds may be effected and (iv) notices and demands to or upon the
Company in respect of the Series I Bonds and the Indenture may be
served; and JPMorgan Chase Bank shall be the Security Registrar for the
Series I Bonds; provided, however, that the Company reserves the right
to change, by one or more Officer's Certificates, any such place or the
Security Registrar; and provided, further, that the Company reserves
the right to designate, by one or more Officer's Certificates, its
principal office in Houston, Texas as any such place or itself as the
Security Registrar; provided, however, that there shall be only a
single Security Registrar for the Series I Bonds. The principal of the
Series I Bonds shall be payable without the presentment or surrender
thereof.

(7) Not applicable.

(8) Not applicable.

(9) The Series I Bonds are issuable only in denominations of
$1,310,000,000.

(10) Not applicable.

(11) Not applicable.

(12) Not applicable.

(13) See subsection (4) above.

(14) Not applicable.

(15) Not applicable.

(16) Not applicable.

(17) The Series I Bonds shall be evidenced by a single registered
Series I Bond in the principal amount and denomination of One Billion
Three Hundred Ten Million Dollars ($1,310,000,000). The Series I Bonds
shall be dated November 12, 2002, shall mature no later than November
12, 2005, unless sooner paid, and shall bear interest at the rate
specified in subsection (5) above. The Series I Bonds may be executed
by the Company and delivered to the Trustee for authentication and
delivery. The principal of and interest on the Series I Bonds shall be
payable at the Corporate Trust Office of the Trustee in Houston, Texas.

The single Series I Bond shall be identified by the number I-1 and
shall upon issuance be delivered by the Company to, and registered in
the name of, the Administrative Agent, on behalf of itself and the
Banks, and shall be transferable only as required to effect an
assignment thereof to a successor or an assign of the Administrative
Agent under the Credit Agreement and provided that all obligations of
the Administrative Agent under the Pledge Agreement (as defined below)
shall also be transferred to, and assumed by, any such successor or
assign. The Series I Bonds are to be issued to the Administrative Agent
as security for the payment by the Company of its Obligations (as
defined in the Pledge Agreement). The single Series I Bond shall be
held by the Administrative Agent subject to the terms of the Pledge
Agreement, dated as of November 12, 2002, between the Company and the
Administrative Agent (the "Pledge Agreement").

Series I Bonds issued upon transfer shall be numbered consecutively
from I-2 upwards and issued in the same $1,310,000,000 denomination
but, to the extent that the Loans are repaid, the registered holder
thereof shall duly note on the Series I Bonds like reduction in the
amount of principal in the Schedule of Prepayments to such Series I
Bond and upon any transfer of said Series I Bond, such Schedule of
Prepayments shall transfer to the subsequently issued Series I Bond.
See also subsection (19) below.

(18) Not applicable.

(19) The holder of the Series I Bond by acceptance of the Series I
Bond agrees to restrictions on transfer and to waivers of certain
rights of exchange as set forth herein. The Series I Bonds have not
been registered under the Securities Act of 1933 and may not be
offered, sold or otherwise transferred in the absence of such
registration or an applicable exemption therefrom. No service charge
shall be made for the registration of transfer or exchange of the
Series I Bonds, or any Tranche thereof; provided, however, that the
Company may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection with the exchange or
transfer.

(20) For purposes of the Series I Bonds, "Business Day" shall mean
a day other than a Saturday, Sunday or other day on which commercial
banks in New York City are authorized or required by law to close.

(21) Not Applicable.

(22) The Trustee may conclusively presume that the obligation of
the Company to pay the principal of and interest on the Series I Bond
shall have been fully satisfied and discharged unless and until it
shall have received a written notice from the Administrative Agent,
signed by an authorized officer of the Administrative Agent and
attested by the Secretary or an Assistant Secretary of the
Administrative Agent within 90 days after the applicable Interest
Payment Date, stating that the payment of principal of or interest on
the Series I Bond has not been fully paid when due and specifying the
amount of funds required to make such payment.

The Series I Bonds shall have such other terms and provisions as are
provided in the form thereof attached hereto as Exhibit A, and shall be
issued in substantially such form.

2. The undersigned has read all of the covenants and conditions contained
in the Indenture, and the definitions in the Indenture relating thereto,
relating to the issuance of the Series I Bonds and in respect of compliance with
which this certificate is made.

3. The statements contained in this certificate are based upon the
familiarity of the undersigned with the Indenture, the documents accompanying
this certificate, and upon discussions by the undersigned with officers and
employees of the Company familiar with the matters set forth herein.

4. In the opinion of the undersigned, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenants and conditions have been complied with.

In the opinion of the undersigned, such conditions and covenants have
been complied with.

IN WITNESS WHEREOF, the undersigned has executed this Officer's
Certificate on this 12th day of November, 2002.

NOTE: THE HOLDER OF THIS BOND BY ACCEPTANCE HEREOF AGREES TO RESTRICTIONS ON
TRANSFER AND TO INDEMNIFICATION PROVISIONS AS SET FORTH BELOW. IN ADDITION, THE
BOND REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND SUCH BOND MAY NOT BE TRANSFERRED WITHOUT COMPLIANCE
WITH APPLICABLE SECURITIES LAWS.

THIS BOND IS NOT TRANSFERABLE EXCEPT AS COLLATERAL TO A SUCCESSOR OR ASSIGN OF
THE ADMINISTRATIVE AGENT UNDER THE COLLATERAL AGREEMENT REFERRED TO HEREIN AMONG
THE COMPANY AND THE SEVERAL PARTIES THERETO.

This Security is not an Original Issue Discount Security
within the meaning of the within-mentioned Indenture.

Principal Amount
$1,310,000,000 No. I-1

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, a limited liability company duly
organized and existing under the laws of the State of Texas (herein called the
"Company," which term includes any successor under the Indenture referred to
below), for value received, hereby promises to pay to Credit Suisse First
Boston, as Administrative Agent (the "Administrative Agent"), or its registered
assigns, on behalf of itself and the Banks (as defined below), the principal sum
of ONE BILLION THREE HUNDRED TEN MILLION DOLLARS, or such lesser principal
amount as shall be equal to the aggregate principal amount of Loans (as defined
in the Credit Agreement defined below) outstanding from time to time under the
Credit Agreement (as defined below), in whole or in installments on such date or
dates as the Company has any obligations under the Credit Agreement to repay any
Loans to the Banks (whether upon scheduled maturity, required prepayment,
acceleration, demand or otherwise), but not later than the Stated Maturity
specified above. The amount of principal of this Bond payable by the Company on
any such date shall equal the aggregate principal amount of the Loans due and
payable on such date pursuant to the Credit Agreement (but, in no event, shall
exceed the principal amount of this Bond). The obligation of the Company to make
any payment of the principal on this Bond shall be fully or partially, as the
case may be, deemed to have been paid or otherwise satisfied and discharged to
the extent that the Company has paid the principal then due and payable on the
Loans made pursuant to the Credit Agreement.

Interest shall be payable on this Bond on each Interest Payment Date (as
hereinafter defined) at such rate per annum as shall cause the amount of
interest payable on such Interest Payment Date on this Bond to equal the amount
of interest payable on such Interest Payment Date under the Credit Agreement.
Such interest shall be payable on the same dates as interest is payable from
time to time in respect of the Loans pursuant to the Credit Agreement (each such
date herein called an "Interest Payment Date"), until the maturity of this Bond,
or, if the Company shall default in the payment of the principal due on this
Bond, until the Company's obligation with respect to the payment of such
principal shall be discharged as provided in the Indenture. The amount of
interest payable from time to time under

the Credit Agreement, the basis on which such interest is computed and the dates
on which such interest is payable are set forth in the Credit Agreement. This
Bond shall bear interest (a) from the date of initial authentication of this
Bond to but excluding the Interest Payment Date next succeeding, and (b) from
each Interest Payment Date to but excluding the Interest Payment Date next
succeeding. The obligation of the Company to make any payment of interest on
this Bond shall be fully or partially, as the case may be, deemed to have been
paid or otherwise satisfied and discharged to the extent that the Company has
paid the interest on the Loans then due and payable pursuant to the Credit
Agreement.

This Bond is issued to the Administrative Agent by the Company pursuant to the
Company's obligations under the Credit Agreement, dated as of November 12, 2002
(as amended, supplemented, restated or otherwise modified from time to time, the
"Credit Agreement"), among the Company, Credit Suisse First Boston, as
Administrative Agent, and the banks and other financial institutions from time
to time parties thereto (the "Banks"). This Bond shall be held by the
Administrative Agent subject to the terms of the Pledge Agreement, dated as of
November 12, 2002, between the Company, the Administrative Agent and the
Administrative Agent in such capacity under the Credit Agreement. Any
capitalized terms used herein and not defined herein shall have the meanings
specified in the Indenture (as defined below), unless otherwise noted.

The Administrative Agent shall surrender this Bond to the Trustee when all of
the principal of and interest on the Loans made pursuant to the Credit Agreement
shall have been duly paid and the Credit Agreement shall have been terminated.

Payments of the principal of and interest on this Bond shall be made at the
Corporate Trust Office of JPMorgan Chase Bank, as Trustee, located at 600 Travis
Street, Suite 1150, Houston, Texas 77002, or at such other office or agency as
may be designated for such purpose by the Company from time to time. Payment of
the principal of and interest on this Bond, as aforesaid, shall be made in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for the payment of public and private debts.

This Bond is one of a duly authorized issue of securities of the Company (herein
called the "Securities"), issued and issuable in one or more series under and
equally secured by a General Mortgage Indenture, dated as of October 10, 2002
(such Indenture as originally executed and delivered and as supplemented or
amended from time to time thereafter, together with any constituent instruments
establishing the terms of particular Securities, being herein called the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (herein
called the "Trustee," which term includes any successor trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a description of the property mortgaged, pledged and held in
trust, the nature and extent of the security and the respective rights,
limitations of rights, duties and immunities of the Company, the Trustee and the
Holders of the Securities thereunder and of the terms and conditions upon which
the Securities are, and are to be, authenticated and delivered and secured. The
acceptance of this Bond shall be deemed to constitute the consent and agreement
by the Holder hereof to all of the terms and provisions of the Indenture. This
Bond is one of the series designated above.

The Bonds of this series will not be entitled to the benefit of any sinking fund
or voluntary redemption provisions.

If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of this Bond may be declared due and payable in the
manner and with the effect provided in the Indenture.

The Indenture permits, with certain exceptions as therein provided, the Trustee
to enter into one or more supplemental indentures for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the Indenture with the consent of the Holders of not less than a majority in
aggregate principal amount of the Securities of all series then Outstanding
under the Indenture, considered as one class; PROVIDED, HOWEVER, that if there
shall be Securities of more than one series Outstanding under the Indenture and
if a proposed supplemental indenture shall directly affect the rights of the
Holders of Securities of one or more, but less than all, of such series, then
the consent only of the Holders of a majority in aggregate principal amount of
the Outstanding Securities of all series so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that if the Securities of any
series shall have been issued in more than one Tranche and if the proposed
supplemental indenture shall directly affect the rights of the Holders of
Securities of one or more, but less than all, of such Tranches, then the consent
only of the Holders of a majority in aggregate principal amount of the

Outstanding Securities of all Tranches so directly affected, considered as one
class, shall be required; and PROVIDED, FURTHER, that the Indenture permits the
Trustee to enter into one or more supplemental indentures for limited purposes
without the consent of any Holders of Securities. The Indenture also contains
provisions permitting the Holders of a majority in principal amount of the
Securities then Outstanding, on behalf of the Holders of all Securities, to
waive compliance by the Company with certain provisions of the Indenture and
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Bond shall be conclusive and binding
upon such Holder and upon all future Holders of this Bond and of any Security
issued upon the registration of transfer hereof or in exchange therefor or in
lieu hereof, whether or not notation of such consent or waiver is made upon this
Bond.

As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Bond is registrable in the Security Register, upon
surrender of this Bond for registration of transfer at the Corporate Trust
Office of JPMorgan Chase Bank in Houston, Texas or such other office or agency
as may be designated by the Company from time to time, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Bonds of this
series of authorized denominations and of like tenor and aggregate principal
amount, will be issued to the designated transferee or transferees.

This Bond has been issued by the Company to the Administrative Agent for the
benefit of the holders of the Loans to (i) provide security for the payment of
the Company's obligations on the Loans under the Credit Agreement and (ii)
provide to the holders of such Loans the benefits of the security provided for
this Bond pursuant to the Indenture.

The Company, the Trustee and any agent of the Company or the Trustee may deem
and treat the person in whose name this Bond shall be registered upon the
Security Register for the Bonds of this series as the absolute owner of such
Bond for the purpose of receiving payment of or on account of the principal of
and interest on this Bond and for all other purposes, whether or not this Bond
be overdue, and neither the Company nor the Trustee shall be affected by any
notice to the contrary; and all such payments so made to such registered owner
or upon his order shall be valid and effectual to satisfy and discharge the
liability upon this Bond to the extent of the sum or sums paid.

The Trustee may conclusively presume that the obligation of the Company to pay
the principal of and interest on this Bond shall have been fully satisfied and
discharged unless and until it shall have received a written notice from the
Administrative Agent, signed by an authorized officer of the Administrative
Agent and attested by the Secretary or an Assistant Secretary of the
Administrative Agent within 90 days after the applicable Interest Payment Date,
stating that the payment of principal of or interest on this Bond has not been
fully paid when due and specifying the amount of funds required to make such
payment.

Before any transfer of this Bond by the registered holder or his or its legal
representative will be recognized or given effect by the Company or the Trustee,
the registered holder shall note the amounts of all reductions in the principal
of the Loans under the Credit Agreement, and shall notify the Company and the
Trustee of the name and address of the transferee and shall afford the Company
and the Trustee the opportunity of verifying the notation as to such reductions.
By acceptance hereof the holder of this Bond and each transferee shall be deemed
to have agreed to indemnify and hold harmless the Company and the Trustee
against all losses, claims, damages or liability arising out of any failure on
part of the holder or of any such transferee to comply with the requirements of
the preceding sentence.

No recourse under or upon any obligation, covenant or agreement contained in the
Indenture or in any indenture supplemental thereto, or in any Bond or coupon
thereby secured, or because of any indebtedness thereby secured, shall be had
against any incorporator, member, manager, stockholder, officer, director or
employee, as such, past, present or future, of the Company or any predecessor or
successor corporation or company, either directly or through the Company or any
predecessor or successor corporation or company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly agreed and understood that the
Indenture, any indenture supplemental thereto and the obligations thereby
secured, are solely corporate obligations of the Company, and that no personal
liability whatsoever shall attach to, or be incurred by, such incorporators,
members, managers, stockholders, officers, directors or employees, as such, of
the Company or of any predecessor or successor corporation or company, or any of
them, because of the creation of

the indebtedness thereby authorized, or under or by reason of any of the
obligations, covenants or agreements contained in the Indenture or in any
indenture supplemental thereto or in any of the Bonds or coupons thereby
secured, or implied therefrom.

This Bond shall be governed by and construed in accordance with the law of the
State of New York except as provided in the Indenture.

Unless the certificate of authentication hereon has been executed by the Trustee
or an Authenticating Agent by manual signature, this Bond shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any purpose.

[The remainder of this page is intentionally left blank.]

IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

By: ____________________________________

Name:

Title:

CERTIFICATE OF AUTHENTICATION

This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.

Date of Authentication: November __, 2002

JPMORGAN CHASE BANK, as Trustee

By: ____________________________________

Authorized Signatory

EXHIBIT 10(p)(7)

RELIANT ENERGY, INCORPORATED

1994 LONG-TERM INCENTIVE COMPENSATION PLAN

(As Amended and Restated Effective January 1, 2001)

First Amendment

Reliant Energy, Incorporated, a Texas corporation (the
"Company"), having established the Reliant Energy, Incorporated 1994 Long-Term
Incentive Compensation Plan, as amended and restated effective January 1, 2001
(the "Plan"), and having reserved the right under Section 11.1 thereof to amend
the Plan, does hereby amend the Plan, effective as of the dates specified
herein, as follows:

1. Effective as of August 31, 2002, the Plan is hereby amended to
provide that all references to "Reliant Energy, Incorporated" are deleted and
replaced in lieu thereof with "CenterPoint Energy, Inc." and the definition of
"Company" in Section 2.1(e) of the Plan is hereby amended to read as follows:

2. Effective as of October 2, 2002, the Plan is hereby renamed
the CenterPoint Energy, Inc. 1994 Long-Term Incentive Compensation Plan, with
all related references in the Plan amended accordingly, and the definition of
"Plan" in Section 2.1(r) of the Plan is hereby amended to read as follows:

"(r) `Plan' means the CenterPoint Energy, Inc. 1994 Long-Term
Incentive Compensation Plan, as set forth herein and as from time to
time amended."

3. Effective as of December 1, 2003, Section 8.1(d) of the Plan
is hereby amended by changing the heading to "Transferability of Options:" and
by adding the following new sentence to the end thereof:

1

"The foregoing notwithstanding, an Option granted under this Plan shall
become transferable by the Key Employee upon or after his termination
of employment with the Company, to the extent the Option is vested and
exercisable at the time of such transfer, if (i) the former Key
Employee assumes an office or position with a federal, state or local
government or agency or instrumentality thereof (whether by employment,
appointment or election, and whether legislative, executive, judicial
or administrative) and (ii) following written request to the Committee
identifying the office or position and the basis for the requested
determination, the Committee determines, in its sole discretion, that
by reason of the former Key Employee's holding of such office or
position, the holding of such Option, the exercise thereof or the
acquisition, holding or voting of the Common Stock issuable upon
exercise thereof is, or is likely to, (x) be prohibited or restricted
by law, regulation or order, or (y) give rise to or result in an actual
or potential conflict of interest, disqualification or similar
impediment in or to the exercise of the duties and responsibilities of
such office or position."

IN WITNESS WHEREOF, CenterPoint Energy, Inc. has caused these
presents to be executed by its duly authorized officer in a number of copies,
all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 1st day of December,
2003, but effective as of the dates specified above.

THIS AGREEMENT is made by and between CENTERPOINT ENERGY, INC.
(the "Company"), and THE NORTHERN TRUST COMPANY, an Illinois corporation
(hereinafter referred to as "Trustee");

WHEREAS, the Company and the Trustee entered into the
CenterPoint Energy, Inc. Savings Trust (formerly the Reliant Energy,
Incorporated Savings Trust) effective April 1, 1999 and as thereafter amended
(hereinafter referred to as the "Trust"); and

WHEREAS the Company and the Trustee desire to amend the Trust
pursuant to Section 10.4 of the
Trust;

NOW, THEREFORE, effective as of January 6, 2003, the sections
of the Trust set forth below are amended as follows, but all other sections of
the Trust shall remain in full force and effect:

1. Section 1.1 of the Trust is hereby amended by adding
the following new definition of "TGN Stock":

"TGN STOCK: The common stock of Texas Genco. TGN Stock shall
be `qualifying employer securities' within the meaning of Section
409(l) of the Code and Section 407(d)(5) of ERISA for so long as Texas
Genco is a member of the Company's controlled group for purposes of
Section 409(l) of the Code."

2. Section 1.1 of the Trust is hereby amended by adding
the following new definition of "Texas Genco":

"TEXAS GENCO: Texas Genco Holdings, Inc., a Texas
corporation."

3. Section 4.2 of the Trust is hereby amended by
inserting the following new sentences at the end of subparagraph (b) as follows:

"Notwithstanding any provision of this Trust to the contrary, with
respect to all TGN Stock received as a dividend in the unallocated
portion of the ESOP Fund, the Committee may appoint an Investment
Manager for purposes of liquidating such TGN Stock and for purposes of
reinvesting such proceeds into Company Stock. Such Investment Manager
shall acknowledge by a writing delivered to the Committee that it is a
fiduciary with respect to the TGN Stock or other assets allocated
thereto. The Trustee shall act with respect to such TGN Stock or other
assets allocated to such Investment Manager only as directed by the
Investment Manager. The Trustee shall not make any investment review
of, consider the propriety of holding or selling, or vote, any TGN
Stock or other assets allocated to such Investment Manager, except as
directed by the Investment Manager thereof."

4. Section 4.2 of the Trust is hereby amended by
inserting a new subparagraph (h) immediately after subparagraph (g) as follows:

"(h) TGN Stock Fund: The TGN Stock Fund shall be a `frozen
fund' for which no purchases of TGN Stock shall be made, except with
respect to the reinvestment of dividends as described below. The
Trustee shall not be required to advance funds to make any transfers or
distributions from the TGN Stock Fund. Dividends, if any, received in
the TGN Stock Fund shall be reinvested in the TGN Stock Fund. Any cash
held by the Trustee from time to time in the TGN Stock Fund may be
invested in the collective short term investment fund of the Trustee.
All TGN Stock held in the TGN Stock Fund shall be voted or tendered, as
applicable, by the Trustee, in its sole discretion. No provision of
this paragraph (h) shall prevent the Trustee from taking any action
relating to its duties under this paragraph (h) if the Trustee
determines in its sole discretion that such action is necessary in
order for the Trustee to fulfill its fiduciary responsibilities under
ERISA."

5. Section 6.7 of the Trust is hereby amended by adding
the following new paragraph to the end thereof:

"Except for the short-term investment of cash and the purchase
of stock for the reinvestment of dividends, if any, into the TGN Stock
Fund, the Company has limited the investment power of the Trustee in
the TGN Stock Fund to the retention and sale of TGN Stock. The Trustee
shall not be liable for the purchase, retention, or sale of TGN Stock
in accordance with the provisions of Section 4.2 hereof, and the
Company (which has the authority to do so under the laws of the state
of its incorporation) agrees to indemnify The Northern Trust Company
from any liability, loss and expense, including legal fees and expenses
which The Northern Trust Company may sustain by reason of purchase,
retention, or sale of TGN Stock in accordance with the provisions of
Section 4.2 hereof; provided, however, that to the extent that such
liability, loss or expense arises from the Trustee's willful
misconduct, bad faith or negligence in carrying out its ministerial
functions under Section 4.2. This paragraph shall survive the
termination of this Trust."

IN WITNESS WHEREOF, the Company and the Trustee have caused
this Amendment to be executed and attested to by their respective officers, in a
number of copies, all of which shall constitute one and the same instrument,
which may be sufficiently evidenced by any executed copy hereof, on the day and
year first written above.

CenterPoint Energy, Inc., a Texas corporation (the "Company"),
having reserved the right under Section 15.1 of the CenterPoint Energy, Inc.
Retirement Plan, as amended and restated effective as of January 1, 1999, and as
thereafter amended (the "Plan"), to amend the Plan, does hereby amend certain
provisions of the Plan relating to the NorAm Energy Corp. Employees Retirement
Plan (the "NorAm Plan"), which was merged with and into the Plan effective as of
January 1, 1999, as in effect on such date, that continue to apply with respect
to certain "Grandfathered Benefits" under the Plan for participants who had a
benefit under the NorAm Plan prior to January 1, 1999, effective as of January
1, 2003, as follows:

1. The first sentence of Section 4.5 of the NorAm Plan
document is hereby amended to read as follows:

"Notwithstanding any other provision of this Article, the retirement
benefit payable to a Participant will not be less than the retirement
benefit that the Participant had accrued as of December 31, 1991 (or,
if the Participant commenced benefits before January 1, 2003 and was a
Super Highly Compensated Employee for any Plan Year before 1992, as of
his Benefit Protection Date as hereafter defined) under the terms of
the Retirement Plan in effect on December 31, 1988 (including early
retirement age and factors and other actuarial assumptions), determined
as if the Participant had a Separation from Service on December 31,
1991, or his Benefit Protection Date, whichever applies."

2. Section 4.9 of the NorAm Plan document is hereby
amended in its entirety to read as follows:

"4.9 Special Rule - Preservation of Prior Formula. For any
Participant who commences retirement benefits on or after January 1,
2003, the retirement benefit will be the greater of (i) the retirement
benefit determined under the foregoing provisions of this Article for
all years of Credited Service or (ii) the retirement benefit the
Participant would be entitled to receive under the Retirement Plan
formula applicable to such Participant on December 31, 1991 (as if this
Plan had not been adopted, including all relevant early retirement
factors and actuarial assumptions) applied to the same Credited Service
period as applied to (i) above.

1

Notwithstanding, the retirement benefit of any other
Participant who (i) was not a Highly Compensated Employee (as defined
in Code Section 414(q)) on December 31, 1991, and (ii) was an active
Employee on December 31, 1991, or had a Separation from Service prior
to such date and is later rehired under circumstances in which his
prior service is taken into account under Article 2, will be the
greater of (1) the benefit determined under the foregoing provisions of
this Article for all years of Credited Service or (2) in lieu of such
benefit, the benefit the Participant would be entitled to receive under
the Retirement Plan formula applicable to such Participant on December
31, 1991 (as if this Plan had not been adopted, including all relevant
early retirement factors and actuarial assumptions, except as otherwise
provided in this Section), applied to the period of Credited Service
ending with the close of the Plan Year (after 1991) in which the
Participant first becomes a Highly Compensated Employee. For purposes
of determining benefits accruing under this Section in Plan Years
beginning after 1994, Section 4.5(a) of the benefit formula under Part
Three of the Retirement Plan will be applied by replacing `5 years of
Vesting Service' with `10 years of Vesting Service.' If a Participant
is entitled to a benefit under this Section, the benefit will be
payable only in the forms of payment applicable under Article 5, except
to the extent that a form of payment provided under the Retirement Plan
is protected under Section 5.10."

IN WITNESS WHEREOF, CenterPoint Energy, Inc. has caused these
presents to be executed by its duly authorized officer in a number of copies,
all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 5th day of November
2003, but effective as of the date specified above.

Reliant Energy, Incorporated, a Texas corporation (the
"Company"), having established the Long-Term Incentive Plan of Reliant Energy,
Incorporated, effective as of January 1, 2001, and as thereafter amended (the
"Plan"), and having reserved the right under Section 12 thereof to amend the
Plan, does hereby amend the Plan, effective as of the dates specified herein, as
follows:

1. Effective as of August 31, 2002, the Plan is hereby
amended to provide that all references to "Reliant Energy, Incorporated" are
deleted and replaced in lieu thereof with "CenterPoint Energy, Inc." and the
definition of "Company" in Section 3 of the Plan is hereby amended to read as
follows:

"`COMPANY' means CenterPoint Energy, Inc., a Texas
corporation."

2. Effective as of October 2, 2002, the Plan is hereby
renamed the Long-Term Incentive Plan of CenterPoint Energy, Inc., with all
related references in the Plan amended accordingly.

3. Effective as of December 1, 2003, Section 13 of the
Plan is hereby amended by adding the following new paragraph to the end thereof:

"The foregoing notwithstanding, an Option granted
under this Plan shall become transferable by the Employee upon
or after his termination of employment with the Company, to
the extent the Option is vested and exercisable at the time of
such transfer, if (i) the former Employee assumes an office or
position with a federal, state or local government or agency
or instrumentality thereof (whether by employment, appointment
or election, and whether legislative, executive, judicial or
administrative) and (ii) following written request to the
Committee identifying the office

or position and the basis for the requested determination, the
Committee determines, in its sole discretion, that by reason
of the former Employee's holding of such office or position,
the holding of such Option, the exercise thereof or the
acquisition, holding or voting of the Common Stock issuable
upon exercise thereof is, or is likely to, (x) be prohibited
or restricted by law, regulation or order, or (y) give rise to
or result in an actual or potential conflict of interest,
disqualification or similar impediment in or to the exercise
of the duties and responsibilities or such office or
position."

IN WITNESS WHEREOF, CenterPoint Energy, Inc. has caused these
presents to be executed by its duly authorized officer in a number of copies,
all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 1st day of December
2003, but effective as of the dates specified above.

CENTERPOINT ENERGY, INC.

By /s/ David M. McClanahan
---------------------------------------
David M. McClanahan
President and Chief Executive Officer

The purpose of this CenterPoint Energy, Inc. Stock Plan for
Outside Directors, as amended and restated effective May 7, 2003 (the "Plan") is
to provide for a method of compensation of Outside Directors of CenterPoint
Energy, Inc. and any successor thereto (the "Company") that will strengthen the
alignment of their financial interests with those of the Company's shareholders
through increased ownership of shares of the Company's Common Stock by such
Outside Directors. The Plan is intended to (i) enhance the Company's ability to
maintain a competitive position in attracting and retaining qualified Outside
Directors who contribute, and are expected to contribute, materially to the
success of the Company and its Subsidiaries; (ii) provide a means of
compensating such Outside Directors whereby the compensation received will have
a value dependent on the price of the Common Stock; and (iii) enhance the
interest of such Outside Directors in the Company's continued success and
progress by further aligning each Outside Director's interests with those of the
Company's shareholders. Stock Awards under this Plan shall be in addition to the
annual retainer fee and meeting fees earned by Outside Directors of the Company.

ARTICLE II

DEFINITIONS

For purposes of the Plan, the terms set forth below shall have
the following meanings:

"ANNUAL AWARD DATE" means the first business day of the month
immediately following each Annual Meeting of Shareholders, commencing
with the June 2nd following the May 7, 2003 Annual Meeting of
Shareholders of the Company.

"BOARD" means the Board of Directors of the Company.

A "CHANGE OF CONTROL" shall be deemed to have occurred upon
the occurrence of any of the following events:

(a) 30% Ownership Change: Any Person makes an acquisition
of Outstanding Voting Stock and is, immediately thereafter, the
beneficial owner of 30% or more of the then Outstanding Voting Stock,
unless such acquisition is made directly from the Company in a
transaction approved by a majority of the Incumbent Directors; or any
group is formed that is the beneficial owner of 30% or more of the
Outstanding Voting Stock; or

Page 1 of 8

(b) Board Majority Change: Individuals who are Incumbent
Directors cease for any reason to constitute a majority of the members
of the Board; or

(c) Major Mergers and Acquisitions: Consummation of a
Business Combination unless, immediately following such Business
Combination, (i) all or substantially all of the individuals and
entities that were the beneficial owners of the Outstanding Voting
Stock immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 70% of the then outstanding shares of
voting stock of the parent corporation resulting from such Business
Combination in substantially the same relative proportions as their
ownership, immediately prior to such Business Combination, of the
Outstanding Voting Stock, (ii) if the Business Combination involves the
issuance or payment by the Company of consideration to another entity
or its shareholders, the total fair market value of such consideration
plus the principal amount of the consolidated long-term debt of the
entity or business being acquired (in each case, determined as of the
date of consummation of such Business Combination by a majority of the
Incumbent Directors) does not exceed 50% of the sum of the fair market
value of the Outstanding Voting Stock plus the principal amount of the
Company's consolidated long-term debt (in each case, determined
immediately prior to such consummation by a majority of the Incumbent
Directors), (iii) no Person (other than any corporation resulting from
such Business Combination) beneficially owns, directly or indirectly,
30% or more of the then outstanding shares of voting stock of the
parent corporation resulting from such Business Combination and (iv) a
majority of the members of the board of directors of the parent
corporation resulting from such Business Combination were Incumbent
Directors of the Company immediately prior to consummation of such
Business Combination; or

(d) Major Asset Dispositions: Consummation of a Major
Asset Disposition unless, immediately following such Major Asset
Disposition, (i) individuals and entities that were beneficial owners
of the Outstanding Voting Stock immediately prior to such Major Asset
Disposition beneficially own, directly or indirectly, more than 70% of
the then outstanding shares of voting stock of the Company (if it
continues to exist) and of the entity that acquires the largest portion
of such assets (or the entity, if any, that owns a majority of the
outstanding voting stock of such acquiring entity) and (ii) a majority
of the members of the board of directors of the Company (if it
continues to exist) and of the entity that acquires the largest portion
of such assets (or the entity, if any, that owns a majority of the
outstanding voting stock of such acquiring entity) were Incumbent
Directors of the Company immediately prior to consummation of such
Major Asset Disposition.

For purposes of the foregoing,

(1) the term "Person" means an individual, entity or
group;

(2) the term "group" is used as it is defined for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934
(the "Exchange Act");

Page 2 of 8

(3) the term "beneficial owner" is used as it is defined
for purposes of Rule 13d-3 under the Exchange Act;

(4) the term "Outstanding Voting Stock" means outstanding
voting securities of the Company entitled to vote generally in the
election of directors; and any specified percentage or portion of the
Outstanding Voting Stock (or of other voting stock) shall be determined
based on the combined voting power of such securities;

(5) the term "Incumbent Director" means a director of the
Company (x) who was a director of the Company on May 7, 2003 or (y) who
becomes a director subsequent to such date and whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of a majority of the Incumbent Directors at the time of such
election or nomination, except that any such director shall not be
deemed an Incumbent Director if his or her initial assumption of office
occurs as a result of an actual or threatened election contest or other
actual or threatened solicitation of proxies by or on behalf of a
Person other than the Board;

(6) the term "election contest" is used as it is defined
for purposes of Rule 14a-11 under the Exchange Act;

(7) the term "Business Combination" means (x) a merger or
consolidation involving the Company or its stock or (y) an acquisition
by the Company, directly or through one or more subsidiaries, of
another entity or its stock or assets;

(8) the term "parent corporation resulting from a
Business Combination" means the Company if its stock is not acquired or
converted in the Business Combination and otherwise means the entity
which as a result of such Business Combination owns the Company or all
or substantially all the Company's assets either directly or through
one or more subsidiaries; and

(9) the term "Major Asset Disposition" means the sale or
other disposition in one transaction or a series of related
transactions of 70% or more of the assets of the Company and its
subsidiaries on a consolidated basis; and any specified percentage or
portion of the assets of the Company shall be based on fair market
value, as determined by a majority of the Incumbent Directors.

"CODE" means the Internal Revenue Code of 1986, as amended.

"COMMON STOCK" means, subject to the provisions of Section
7.3, the presently authorized common stock, $0.01 par value, of the
Company.

"DIVIDEND EQUIVALENTS" means, with respect to shares of Common
Stock issued or delivered at the end of the Restriction Period
applicable to a Stock Award, an amount equal to all dividends and other
distributions (or the economic value thereof) that are payable to
shareholders of record during the Restriction Period on a like number
of shares of Common Stock.

"OUTSIDE DIRECTOR" means a person who is a member of the Board
on an Annual Award Date and who is not a current employee of the
Company or a Subsidiary.

"PLAN" means the CenterPoint Energy, Inc. Stock Plan for
Outside Directors, as set forth herein and as from time to time
amended.

"RESTRICTION PERIOD" means the period of time beginning as of
the grant date of a Stock Award and ending on the third anniversary of
the grant date or such earlier time at which the Common Stock subject
to such Stock Award is no longer subject to forfeiture provisions as
provided in Section 5.3.

"STOCK AWARD" means an award of the right to receive shares of
Common Stock granted by the Company to an Outside Director pursuant to,
and subject to the terms, conditions and limitations specified in,
Article V.

"SUBSIDIARY" means a subsidiary corporation of the Company as
defined in Section 424(f) of the Code.

ARTICLE III

SHAREHOLDER APPROVAL, RESERVATION OF SHARES

AND PLAN ADMINISTRATION

3.1 Shareholder Approval: This Plan was originally effective as of
May 22, 1996, and approved by the shareholders of the Company at the May 22,
1996 Annual Meeting of Shareholders ("Prior Plan"). The Plan, as amended and
restated, shall become effective as of May 7, 2003, only if approved by the
affirmative vote, in person or by proxy, of the holders of a majority of the
shares of Common Stock present and entitled to vote at the May 7, 2003 Annual
Meeting of Shareholders. This Plan, as amended and restated, shall automatically
terminate should such shareholder approval not be obtained (and the Prior Plan
as in effect immediately prior to May 7, 2003, shall continue in operation as
then in effect).

3.2 Shares Reserved Under Plan: The aggregate number of shares of
Common Stock which may be issued or delivered under this Plan shall not exceed
350,000 shares, subject to adjustment as hereinafter provided. All or any part
of such 350,000 shares may be issued pursuant to Stock Awards. The shares of
Common Stock which may be granted pursuant to Stock Awards may consist of either
authorized but unissued shares of Common Stock or shares of Common Stock which
have been issued and which shall have been heretofore or are hereafter
reacquired by the Company. The number of shares of Common Stock that are subject
to Stock Awards under this Plan that are forfeited or terminated shall again
immediately become available for Stock Awards hereunder. The Board may from time
to time adopt and observe such

Page 4 of 8

procedures concerning the counting of shares against the Plan maximum as it may
deem appropriate. The total number of shares authorized under this Plan shall be
subject to increase or decrease in order to give effect to the adjustment
provision of Section 7.3 and to give effect to any amendment adopted as provided
in Section 6.1.

3.3 Plan Administration:

(a) This Plan shall be administered by the Board. Subject
to the provisions hereof, the Board shall have full and exclusive power
and authority to administer this Plan and to take all actions that are
specifically contemplated hereby or are necessary or appropriate in
connection with the administration hereof. The Board shall also have
full and exclusive power to interpret this Plan and to adopt such
rules, regulations and guidelines for carrying out this Plan as it may
deem necessary or proper, all of which powers shall be exercised in the
best interests of the Company and in keeping with the objectives of
this Plan. The Board may correct any defect or supply any omission or
reconcile any inconsistency in this Plan or in any Stock Award in the
manner and to the extent the Board deems necessary or desirable. Any
decision of the Board in the interpretation and administration of this
Plan shall lie within its sole and absolute discretion and shall be
final, conclusive and binding on all parties concerned. The Board may
engage in or authorize the engagement of a third party administrator to
carry out administrative functions under the Plan.

(b) No member of the Board or officer of the Company to
whom the Board has delegated authority in accordance with the
provisions of this Section shall be liable for anything done or omitted
to be done by him or her, by any member of the Board or by any officer
of the Company in connection with the performance of any duties under
this Plan, except for his or her own willful misconduct or as expressly
provided by statute.

ARTICLE IV

PARTICIPATION IN PLAN

4.1 Eligibility to Receive Stock Awards: Stock Awards under this
Plan shall be granted only to persons who are Outside Directors who are eligible
to receive awards under Section 5.1 and/or 5.2.

4.2 Participation Not a Guarantee of Continuing Service as a
Member of the Board: Nothing in this Plan shall in any manner be construed to
(a) limit in any way the right or power of the Company's stockholders to remove
an Outside Director, without regard to the effect of such removal on any rights
such Outside Director would otherwise have under this Plan, or (b) give any
right to such an Outside Director (i) to be nominated for reelection or to be
reelected as such and/or (ii) after ceasing to be an Outside Director, to
receive any shares of Common Stock of the Company under this Plan to which such
Outside Director is not entitled under the express provisions of this Plan.

Page 5 of 8

ARTICLE V

STOCK AWARDS

5.1 Initial Awards: On or after the date an individual first
becomes an Outside Director, at the discretion of the Board, such Outside
Director may be granted a one-time, initial Stock Award consisting of the right
to receive up to, but not to exceed, 5,000 shares of Common Stock, as determined
by the Board, with such award subject to the terms, conditions and limitations
set forth in this Plan; provided, however, that such Outside Director is then in
office as of the grant date of such initial Stock Award. Any Stock Award under
this Section 5.1 shall be in addition to, and not in lieu of, any Stock Award
granted under Section 5.2.

5.2 Annual Awards: As of each Annual Award Date, at the discretion
of the Board, each Outside Director then in office may be granted a Stock Award
consisting of the right to receive up to, but not to exceed, 5,000 shares of
Common Stock, as determined by the Board, with such awards subject to the terms,
conditions and limitations set forth in this Plan.

5.3 Vesting of Stock Awards: Each Stock Award granted under this
Plan shall be subject to a Restriction Period and shall vest in increments of
one-third (1/3) of the total number of shares of Common Stock that are subject
thereto on the first, second and third anniversaries of the grant date of the
Stock Award such that all shares of Common Stock that are subject thereto shall
be fully vested on the third anniversary of such grant date. Notwithstanding the
foregoing, a Stock Award shall become immediately vested in full with respect to
all shares of Common Stock that are subject to a Stock Award as of such date (a)
if the Outside Director terminates his or her status as a member of the Board by
reason of the Outside Director's death or (b) upon the date of a Change of
Control. If an Outside Director's service on the Board is terminated for any
reason whatsoever, other than due to death or a Change of Control, all rights to
the unvested portion of his or her Stock Award(s) as of such termination date
shall be immediately and completely forfeited as of such termination date. For
purposes of this Plan, an Outside Director's service on the Board shall be
deemed to have terminated at the close of business on the day preceding the
first date on which he or she ceases to be a member of the Board, unless his or
her termination of service on the Board occurs on or after attaining age 70, in
which case the Outside Director's termination date shall be deemed to be the
last day of the year in which such termination occurs.

5.4 Form of Award: Upon vesting in accordance with Section 5.3,
the number of vested shares of Common Stock subject to the Stock Award shall be
registered in the name of the Outside Director and certificates representing
such Common Stock (unless the Company shall elect to use uncertificated shares)
shall be delivered to the Outside Director as soon as practicable after the date
upon which the Outside Director's right to such shares vested. Upon delivery of
the vested shares of Common Stock pursuant to this Section, the Outside Director
shall also be entitled to receive a cash payment equal to the sum of all
Dividend Equivalents, if any.

Page 6 of 8

ARTICLE VI

AMENDMENT AND TERMINATION OF PLAN

6.1 Amendment, Modification, Suspension or Termination: The Board
may from time to time amend, modify, suspend or terminate the Plan for the
purpose of meeting or addressing any changes in legal requirements or for any
other purpose permitted by law except that no amendment or alteration shall be
effective prior to approval by the Company's shareholders to the extent such
approval is determined to be required by applicable legal requirements or the
listing standards of the New York Stock Exchange.

6.2 Termination: Subject to satisfaction of the requirements of
Section 3.1, this Plan shall continue indefinitely until all shares of Common
Stock authorized for issuance or delivery hereunder by Section 3.2 hereof have
been issued, except the Board may at any time terminate this Plan as of any date
specified in a resolution adopted by the Board. No Stock Awards may be granted
after this Plan has terminated. The termination of the Plan shall not affect the
applicability of any provision of the Plan to Stock Awards made prior to such
termination.

ARTICLE VII

MISCELLANEOUS PROVISIONS

7.1 Restrictions Upon Grant of Stock Awards: The listing on the
New York Stock Exchange or the registration or qualification under any federal
or state law of any shares of Common Stock to be granted pursuant to this Plan
(whether to permit the grant of Stock Awards or the resale or other disposition
of any such shares of Common Stock by or on behalf of the Outside Directors
receiving such shares) may be necessary or desirable and, in any such event, if
the Company so determines, issuance or delivery of such shares of Common Stock
shall not be made until such listing, registration or qualification shall have
been completed. In such connection, the Company agrees that it will use its best
efforts to effect any such listing, registration or qualification, provided,
however, that the Company shall not be required to use its best efforts to
effect such registration under the Securities Act of 1933, as amended, other
than on Form S-8, as presently in effect, or other such forms as may be in
effect from time to time calling for information comparable to that presently
required to be furnished under Form S-8.

7.2 Restrictions Upon Resale of Unregistered Stock: If the shares
of Common Stock that have been transferred to an Outside Director pursuant to
the terms of this Plan are not registered under the Securities Act of 1933, as
amended, pursuant to an effective registration statement, such Outside Director,
if the Company deems it advisable, may be required to represent and agree in
writing (a) that any shares of Common Stock acquired by such Outside Director
pursuant to this Plan will not be sold except pursuant to an effective
registration statement under the Securities Act of 1933, as amended, or pursuant
to an exemption from registration under said Act and (b) that such Outside
Director is acquiring such shares of Common Stock for such Outside Director's
own account and not with a view to the distribution thereof.

Page 7 of 8

7.3 Adjustments: In the event of any subdivision or combination of
outstanding shares of Common Stock or declaration of a dividend payable in
shares of Common Stock or other stock split, then (a) the number of shares of
Common Stock reserved under this Plan and (b) the number of shares delivered
under Section 5.4 on any date occurring after the applicable record date or
effective date shall be proportionately adjusted to reflect such transaction.

7.4 Withholding of Taxes: Unless otherwise required by applicable
federal or state laws or regulations, the Company shall not withhold or
otherwise pay on behalf of any Outside Director any federal, state, local or
other taxes arising in connection with a Stock Award under this Plan. The
payment of any such taxes shall be the sole responsibility of each Outside
Director.

7.5 Governing Law: This Plan and all determinations made and
actions taken pursuant hereto shall be governed by the internal laws of the
State of Texas, except as federal law may apply.

7.6 Unfunded Status of Plan; Establishment of Stock Award Account:
This Plan shall be an unfunded plan. The grant of shares of Common Stock
pursuant to a Stock Award under this Plan shall be implemented by a credit to a
bookkeeping account maintained by the Company evidencing the accrual in favor of
the Outside Director of the unfunded and unsecured right to receive shares of
Common Stock of the Company, which right shall be subject to the terms,
conditions and restrictions set forth in the Plan. Such accounts shall be used
merely as a bookkeeping convenience. The Company shall not be required to
establish any special or separate fund or reserve or to make any other
segregation of assets to assure the issuance of any shares of Common Stock
granted under this Plan. Except as otherwise provided in this Plan, the shares
of Common Stock credited to the Outside Director's bookkeeping account may not
be sold, assigned, transferred, pledged or otherwise encumbered until the
Outside Director has been registered as the holder of such shares of Common
Stock on the records of the Company as provided in Section 5.4. Neither the
Company nor the Board shall be required to give any security or bond for the
performance of any obligation that may be created by this Plan.

7.7 No Assignment or Transfer: No rights to receive Stock Awards
under the Plan shall be assignable or transferable by an Outside Director except
by will or the laws of descent and distribution.